ITEM 1. FINANCIAL STATEMENTS
HARVEST HEALTH & RECREATION INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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March 31,
2021
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December 31,
2020
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(In thousands, except share data)
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|
|
ASSETS
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Current assets:
|
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|
|
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|
|
|
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Cash and cash equivalents
|
|
|
|
$
|
106,948
|
|
|
$
|
78,055
|
|
|
Restricted cash
|
|
|
|
|
3,000
|
|
|
|
4,542
|
|
|
Accounts receivable, net of allowance of $265 and $824, respectively
|
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9,477
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|
|
|
5,051
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|
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Notes receivable, current portion
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|
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8,412
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|
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21,556
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|
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Related party notes receivable, current portion
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|
|
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|
10,313
|
|
|
|
10,052
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Inventory, net
|
|
|
|
|
45,193
|
|
|
|
36,862
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|
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Other current assets
|
|
|
|
|
5,380
|
|
|
|
5,280
|
|
|
Total current assets
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|
188,723
|
|
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161,398
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|
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Notes receivable, net of current portion
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11,036
|
|
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18,211
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Property, plant and equipment, net
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|
161,663
|
|
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|
176,827
|
|
|
Right-of-use assets for operating leases, net
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|
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|
|
98,921
|
|
|
|
60,843
|
|
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Related party right-of-use assets for operating leases, net
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|
|
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|
5,564
|
|
|
|
5,621
|
|
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Intangible assets, net
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272,886
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|
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|
272,118
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Corporate investments
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40,924
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19,091
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Acquisition deposits
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|
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—
|
|
|
|
50
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|
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Goodwill
|
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116,176
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116,041
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Assets held for sale
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6,581
|
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6,585
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Other assets
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22,618
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|
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19,850
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TOTAL ASSETS
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$
|
925,092
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$
|
856,635
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LIABILITIES AND STOCKHOLDERS' EQUITY
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LIABILITIES
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Current liabilities:
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Accounts payable
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$
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14,809
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$
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10,755
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Other current liabilities
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34,948
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28,896
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Contingent consideration, current portion
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10,898
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17,985
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Income tax payable
|
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26,826
|
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17,504
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Operating lease liability, current portion
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2,061
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2,906
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Related party operating lease liability, current portion
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|
142
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|
135
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Notes payable, current portion
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29,713
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20,910
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Total current liabilities
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119,397
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99,091
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Notes payable, net of current portion
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240,046
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244,066
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Warrant liability
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37,261
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20,908
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Operating lease liability, net of current portion
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98,072
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58,637
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Related party operating lease liability, net of current portion
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5,557
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5,595
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Deferred tax liability
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53,082
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53,082
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Total liabilities associated with assets held for sale
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718
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718
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Other long-term liabilities
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53
|
|
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|
63
|
|
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TOTAL LIABILITIES
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|
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554,186
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|
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|
482,160
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#NAME?
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STOCKHOLDERS' EQUITY
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Subordinate Voting Shares (Shares Authorized, Issued and Outstanding at
March 31, 2021: Unlimited, 245,336,531 and 245,336,531, respectively, at
December 31, 2020: Unlimited, 220,913,258 and 220,913,258, respectively)
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—
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—
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|
Multiple Voting Shares (Shares Authorized, Issued and Outstanding at
March 31, 2021: Unlimited, 1,636,065 and 1,636,065, respectively, at
December 31, 2020: Unlimited, 1,828,422 and 1,828,422, respectively)
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—
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—
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Super Voting Shares (Shares Authorized, Issued and Outstanding at
March 31, 2021: Unlimited, 2,000,000 and 2,000,000, respectively, at
December 31, 2020: Unlimited, 2,000,000 and 2,000,000, respectively)
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—
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—
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Capital stock
|
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686,899
|
|
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667,248
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Accumulated deficit
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(316,729
|
)
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|
(293,607
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)
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|
Stockholders' equity attributed to Harvest Health & Recreation Inc.
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370,170
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373,641
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Non-controlling interest
|
|
|
|
|
736
|
|
|
|
834
|
|
|
TOTAL STOCKHOLDERS' EQUITY
|
|
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|
370,906
|
|
|
|
374,475
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
$
|
925,092
|
|
|
$
|
856,635
|
|
The accompanying notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.
3
HARVEST HEALTH & RECREATION INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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For The Three Months Ended March 31,
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2021
|
|
|
2020
|
|
|
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Revenue, net of discounts
|
|
|
|
$
|
88,826
|
|
|
$
|
44,235
|
|
|
Cost of goods sold
|
|
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|
(40,908
|
)
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|
|
(26,086
|
)
|
|
Gross profit
|
|
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|
|
47,918
|
|
|
|
18,149
|
|
|
Expenses
|
|
|
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|
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General and administrative (related party operating lease expense for the three months ended March 31, 2021 and 2020 was $200 and $187, respectively)
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26,276
|
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26,419
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Sales and marketing
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|
898
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|
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|
1,276
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|
Share-based compensation
|
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|
4,862
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|
13,804
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Depreciation and amortization
|
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2,529
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|
1,670
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Total expenses
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|
34,565
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|
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|
43,169
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|
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Operating income (loss)
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13,353
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|
(25,020
|
)
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Other (expense) income
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Gain on sale of assets
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1,795
|
|
|
|
2,419
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Other income
|
|
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|
|
1,504
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|
|
|
9,050
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|
|
Fair value of liability adjustment
|
|
|
|
|
(24,434
|
)
|
|
|
6,945
|
|
|
Foreign currency gain (loss)
|
|
|
|
|
12
|
|
|
|
(138
|
)
|
|
Interest expense (includes related party interest income for the three months ended March 31, 2021 and 2020 was $97 and $99, respectively)
|
|
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|
(8,717
|
)
|
|
|
(4,550
|
)
|
|
Loss before taxes and non-controlling interest
|
|
|
|
|
(16,487
|
)
|
|
|
(11,294
|
)
|
|
Income taxes
|
|
|
|
|
(6,481
|
)
|
|
|
(3,794
|
)
|
|
Net loss from continuing operations before non-controlling interest
|
|
|
|
|
(22,968
|
)
|
|
|
(15,088
|
)
|
|
Net loss from discontinued operations, net of tax
|
|
|
|
|
—
|
|
|
|
(384
|
)
|
|
Net loss before non-controlling interest
|
|
|
|
|
(22,968
|
)
|
|
|
(15,472
|
)
|
|
Net (income) loss attributed to non-controlling interest
|
|
|
|
|
(154
|
)
|
|
|
88
|
|
|
Net loss attributed to Harvest Health & Recreation Inc.
|
|
|
|
$
|
(23,122
|
)
|
|
$
|
(15,384
|
)
|
|
Net loss per share - basic and diluted
|
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
Attributable to Harvest Health and Recreation Inc.
|
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
Attributable to discontinued operations, net of tax
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Weighted-average shares outstanding - basic and diluted
|
|
|
|
|
407,632,006
|
|
|
|
304,179,427
|
|
The accompanying notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.
4
HARVEST HEALTH & RECREATION INC.
CONDENDSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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|
|
|
|
|
|
|
|
|
|
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|
Three Months Ended March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
(In thousands)
|
|
|
CASH FLOW FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(22,968
|
)
|
|
$
|
(15,472
|
)
|
|
Net loss from discontinued operations, net of tax
|
|
|
—
|
|
|
|
384
|
|
|
Adjustments to reconcile net loss to net cash from operating activities
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,519
|
|
|
|
2,454
|
|
|
Amortization of right-of-use assets
|
|
|
1,575
|
|
|
|
1,309
|
|
|
Amortization of debt issuance costs
|
|
|
861
|
|
|
|
1,011
|
|
|
Amortization of debt discount
|
|
|
371
|
|
|
|
405
|
|
|
Amortization of warrant expense
|
|
|
926
|
|
|
|
703
|
|
|
Noncash gain on earnout
|
|
|
—
|
|
|
|
(12,597
|
)
|
|
Noncash gain on deconsolidation
|
|
|
—
|
|
|
|
(6,119
|
)
|
|
Noncash loss on derecognition of asset
|
|
|
—
|
|
|
|
3,555
|
|
|
Gain on North Dakota divestment
|
|
|
(573
|
)
|
|
|
—
|
|
|
Gain on sale leaseback transaction
|
|
|
(1,058
|
)
|
|
|
|
|
Gain on legal settlements
|
|
|
(1,089
|
)
|
|
|
—
|
|
|
Gain on lease derecognition
|
|
|
(357
|
)
|
|
|
(70
|
)
|
|
Change in fair value of financial liability
|
|
|
24,434
|
|
|
|
(6,945
|
)
|
|
Deferred income tax expense
|
|
|
—
|
|
|
|
(945
|
)
|
|
Share-based compensation
|
|
|
4,862
|
|
|
|
13,804
|
|
|
Noncash transaction expenses
|
|
|
64
|
|
|
|
—
|
|
|
Provision for bad debts and credit losses
|
|
|
80
|
|
|
|
—
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,506
|
)
|
|
|
(1,102
|
)
|
|
Inventory
|
|
|
(8,856
|
)
|
|
|
(2,376
|
)
|
|
Other assets
|
|
|
(2,764
|
)
|
|
|
(2,364
|
)
|
|
Income taxes payable
|
|
|
9,322
|
|
|
|
3,560
|
|
|
Accrued expenses and other liabilities
|
|
|
3,192
|
|
|
|
14,532
|
|
|
Accounts payable
|
|
|
3,217
|
|
|
|
1,730
|
|
|
Operating lease liabilities
|
|
|
(700
|
)
|
|
|
(1,488
|
)
|
|
Prepaid expenses and other current assets
|
|
|
202
|
|
|
|
(1,043
|
)
|
|
NET CASH PROVIDED BY (USED IN) CONTINUING OPERATING ACTIVITIES
|
|
|
9,754
|
|
|
|
(7,074
|
)
|
|
NET CASH USED IN DISCONTINUED OPERATING ACTIVITIES
|
|
|
—
|
|
|
|
(384
|
)
|
|
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
|
|
9,754
|
|
|
|
(7,458
|
)
|
|
CASH FLOW FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
|
|
—
|
|
|
|
(14,397
|
)
|
|
Sale leaseback transaction
|
|
|
22,280
|
|
|
|
—
|
|
|
Acquisitions/advances of intangibles
|
|
|
(1,660
|
)
|
|
|
(1,180
|
)
|
|
Acquisition deposits
|
|
|
51
|
|
|
|
—
|
|
|
Prepayment of acquisition consideration
|
|
|
—
|
|
|
|
4,573
|
|
|
Purchases of property, plant and equipment
|
|
|
(9,632
|
)
|
|
|
(14,699
|
)
|
|
Proceeds from divestments
|
|
|
2,121
|
|
|
|
—
|
|
|
Issuance of notes receivable
|
|
|
(261
|
)
|
|
|
(462
|
)
|
|
Payments received on notes receivable
|
|
|
229
|
|
|
|
—
|
|
|
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
|
13,128
|
|
|
|
(26,165
|
)
|
|
CASH FLOW FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds from issuance of equity
|
|
|
6,842
|
|
|
|
58,999
|
|
|
Proceeds from issuance of notes payable
|
|
|
—
|
|
|
|
40,773
|
|
|
Repayment of notes payable
|
|
|
(2,329
|
)
|
|
|
(3,627
|
)
|
|
Payment of finance lease liabilities
|
|
|
(44
|
)
|
|
|
(11
|
)
|
|
Fees paid for debt financing activities
|
|
|
—
|
|
|
|
(1,631
|
)
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
4,469
|
|
|
|
94,503
|
|
|
NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
|
|
|
27,351
|
|
|
|
60,880
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
78,055
|
|
|
|
22,685
|
|
|
RESTRICTED CASH, BEGINNING OF PERIOD
|
|
|
4,542
|
|
|
|
8,000
|
|
|
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD
|
|
|
82,597
|
|
|
|
30,685
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
|
106,948
|
|
|
|
82,515
|
|
|
RESTRICTED CASH, END OF PERIOD
|
|
|
3,000
|
|
|
|
9,050
|
|
|
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD
|
|
$
|
109,948
|
|
|
$
|
91,565
|
|
The accompanying notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.
5
HARVEST HEALTH & RECREATION INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
(In thousands)
|
|
|
Supplemental disclosure with respect to cash flows
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
744
|
|
|
$
|
1,591
|
|
|
Taxes paid
|
|
|
406
|
|
|
|
501
|
|
|
Supplemental disclosure of non-cash activities
|
|
|
|
|
|
|
|
Shares issued for business acquisitions
|
|
|
—
|
|
|
|
4,692
|
|
|
Notes receivable issued upon North Dakota divestment
|
|
|
850
|
|
|
|
—
|
|
|
Notes receivable (net book value) settlement in exchange for investment
|
|
|
21,833
|
|
|
|
—
|
|
|
Financing obtained in exchange for property, plant, and equipment
|
|
|
2,581
|
|
|
|
—
|
|
|
Right-of-use assets obtained in exchange of operating lease liabilities
|
|
|
40,227
|
|
|
|
3,173
|
|
The accompanying notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.
6
HARVEST HEALTH & RECREATION INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
$ Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
|
|
|
|
|
|
|
|
|
|
|
Super
|
|
|
Multiple
|
|
|
Subordinate
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Non-
|
|
|
TOTAL
|
|
|
|
|
Voting
|
|
|
Voting
|
|
|
Voting
|
|
|
Capital
|
|
|
Accumulated
|
|
|
attributed
|
|
|
Controlling
|
|
|
STOCKHOLDERS'
|
|
|
(In thousands, except share data)
|
|
Shares
|
|
|
Shares
|
|
|
Shares
|
|
|
Stock
|
|
|
Deficit
|
|
|
to Harvest
|
|
|
Interest
|
|
|
EQUITY
|
|
|
BALANCE—December 31, 2020
|
|
|
2,000,000
|
|
|
|
1,828,422
|
|
|
|
220,913,258
|
|
|
$
|
667,248
|
|
|
$
|
(293,607
|
)
|
|
$
|
373,641
|
|
|
$
|
834
|
|
|
$
|
374,475
|
|
|
Shares issued
|
|
|
—
|
|
|
|
15,581
|
|
|
|
14,521
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Capital contribution
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
382
|
|
|
|
—
|
|
|
|
382
|
|
|
|
230
|
|
|
|
612
|
|
|
Shares returned and cancelled
|
|
|
—
|
|
|
|
(2,545
|
)
|
|
|
—
|
|
|
|
(1,000
|
)
|
|
|
—
|
|
|
|
(1,000
|
)
|
|
|
—
|
|
|
|
(1,000
|
)
|
|
Warrants exercised for cash
|
|
|
—
|
|
|
|
15,000
|
|
|
|
2,369,422
|
|
|
|
6,842
|
|
|
|
—
|
|
|
|
6,842
|
|
|
|
—
|
|
|
|
6,842
|
|
|
Reclassification of warrant liability related to warrants exercised for cash
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,080
|
|
|
|
—
|
|
|
|
8,080
|
|
|
|
—
|
|
|
|
8,080
|
|
|
Acquisition of non-controlling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
485
|
|
|
|
—
|
|
|
|
485
|
|
|
|
(485
|
)
|
|
|
—
|
|
|
Divestiture of North Dakota assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
3
|
|
|
Conversions to subordinate voting shares
|
|
|
—
|
|
|
|
(220,393
|
)
|
|
|
22,039,330
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,862
|
|
|
|
—
|
|
|
|
4,862
|
|
|
|
—
|
|
|
|
4,862
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
-
|
|
|
|
(23,122
|
)
|
|
|
(23,122
|
)
|
|
|
154
|
|
|
|
(22,968
|
)
|
|
BALANCE—March 31, 2021
|
|
|
2,000,000
|
|
|
|
1,636,065
|
|
|
|
245,336,531
|
|
|
$
|
686,899
|
|
|
$
|
(316,729
|
)
|
|
$
|
370,170
|
|
|
$
|
736
|
|
|
$
|
370,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE—December 31, 2019
|
|
|
2,000,000
|
|
|
|
1,813,388
|
|
|
|
105,786,727
|
|
|
$
|
481,182
|
|
|
$
|
(233,977
|
)
|
|
$
|
247,205
|
|
|
$
|
3,681
|
|
|
$
|
250,886
|
|
|
Shares issued
|
|
|
—
|
|
|
|
418,439
|
|
|
|
—
|
|
|
|
58,999
|
|
|
|
—
|
|
|
|
58,999
|
|
|
|
—
|
|
|
|
58,999
|
|
|
Deconsolidation of Ohio entities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,388
|
|
|
|
1,388
|
|
|
Shares issued in connection with acquisitions
|
|
|
—
|
|
|
|
307,169
|
|
|
|
283,550
|
|
|
|
59,785
|
|
|
|
—
|
|
|
|
59,785
|
|
|
|
—
|
|
|
|
59,785
|
|
|
Conversions to subordinate voting shares
|
|
|
—
|
|
|
|
(37,003
|
)
|
|
|
3,700,300
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Discount on notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
397
|
|
|
|
—
|
|
|
|
397
|
|
|
|
—
|
|
|
|
397
|
|
|
Conversion of convertible note payable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
628
|
|
|
|
—
|
|
|
|
628
|
|
|
|
—
|
|
|
|
628
|
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,804
|
|
|
|
—
|
|
|
|
13,804
|
|
|
|
—
|
|
|
|
13,804
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(15,384
|
)
|
|
|
(15,384
|
)
|
|
|
(88
|
)
|
|
|
(15,472
|
)
|
|
BALANCE—March 31, 2020
|
|
|
2,000,000
|
|
|
|
2,501,993
|
|
|
|
109,770,577
|
|
|
$
|
614,795
|
|
|
$
|
(249,361
|
)
|
|
$
|
365,434
|
|
|
$
|
4,981
|
|
|
$
|
370,415
|
|
The accompanying notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.
7
1. Business Description
Harvest Health & Recreation Inc., a British Columbia corporation (the “Company” or “Harvest”) is a vertically integrated cannabis company that operates from “seed to sale.” The Company holds licenses or provides services to cannabis dispensaries in Arizona, California, Florida, Maryland, Nevada, North Dakota (on February 19, 2021, the Company completed the divestiture of its North Dakota retail assets) and Pennsylvania, with provisional licenses in Massachusetts. In addition, the Company owns CO2 extraction, distillation, purification and manufacturing technology used to produce a line of cannabis topicals, vapes and gems featuring cannabinoids and a hemp-derived product line sold in Colorado. The Company also owns, manufactures and distributes a portfolio of cannabis consumer packaged goods brands, including ROLL ONE, MODERN FLOWER, EVOLAB, CHROMA, CO2LORS, ALCHEMY, AVENUE, LOVELI, and CBX SCIENCES, to third-party licensed retail cannabis stores across the United States as well as to select retail stores the Company owns or operates, in addition to providing support services and financing to a Utah-licensed medical cannabis cultivator.
The Company operates in one segment, the cultivation, processing and sale of cannabis. The Company grows cannabis in outdoor, indoor, and greenhouse facilities for sale in its retail locations and for wholesale. In addition, the Company converts cannabis biomass into formulated oil using a variety of proprietary extraction techniques. The Company uses some of this oil to manufacture products such as vaporizer cartridges and edibles. Harvest sells cannabis, oil, and manufactured products in Harvest dispensaries and to third parties for resale. In addition, the Company collects licensing fees from third parties associated with operations at certain cultivation, manufacturing or retail facilities.
Harvest conducts business through wholly-owned and majority-owned operating subsidiaries, operating agreements and other commercial arrangements established to conduct the different business areas of each business (each an “Operating Subsidiary” and together, “Operating Subsidiaries”). The Company’s principal operating locations and type of operation are listed below:
|
|
|
|
|
|
|
State
|
|
Nature of Operations
|
|
Commencement Periods
|
|
Arizona - 15 locations
|
|
Retail Dispensary
|
|
September 2013 - September 2020
|
|
California - 4 locations
|
|
Retail Dispensary
|
|
December 2018 - October 2019
|
|
Florida - 6 locations
|
|
Retail Dispensary
|
|
February 2019 - July 2019
|
|
Maryland - 3 locations
|
|
Retail Dispensary
|
|
September 2018 - December 2019
|
|
North Dakota - 2 locations*
|
|
Retail Dispensary
|
|
July 2019 - August 2019
|
|
Pennsylvania - 9 locations
|
|
Retail Dispensary
|
|
September 2018 - March 2021
|
|
Arizona
|
|
Greenhouse/Outdoor Grow/Processing Lab
|
|
July 2015 - February 2020
|
|
Colorado - 1 location
|
|
Processing
|
|
Oct-20
|
|
Florida
|
|
Cultivation/Processing
|
|
February 2019 - December 2019
|
|
Maryland
|
|
Cultivation/Processing
|
|
September 2017 - July 2019
|
|
Nevada
|
|
Cultivation/Processing
|
|
August 2020
|
|
Pennsylvania
|
|
Cultivation/Processing
|
|
March 2020
|
|
Utah
|
|
Indoor Grow
|
|
October 2020
|
|
|
|
|
*
|
On February 19, 2021, the Company divested the two retail dispensary locations located in North Dakota for an immaterial amount of cash.
|
The Company is in various stages of expansion as it is growing its commercial footprint by focusing on acquiring and building additional retail, cultivation and processing locations for medical and adult use cannabis in its existing key markets.
Each Operating Subsidiary either holds the active and/or pending cannabis licenses associated with its activities, or has a commercial arrangement with the operating locations, and/or owns the real estate and primary fixed assets used in the cannabis businesses.
In certain states, cannabis licenses are typically divided into three categories: dispensary, cultivation, and processing. Dispensary licenses comprise the retail operations and allow a company to dispense cannabis to patients. Cultivation licenses allow a company to grow cannabis plants. Processing licenses allow for the processing of cannabis into other products (e.g., edibles, oil, etc.). Cultivation and processing licenses comprise the wholesale operations.
In other states, cannabis licenses are defined as vertically integrated, which allows the license holder the right to engage in dispensary, cultivation and processing activities.
The Company’s corporate headquarters is located at 1155 W. Rio Salado Parkway, Suite 201, Tempe, AZ, 85281. The Company has one class of stock that is traded on the Canadian Stock Exchange (“CSE”) and on the OTCQX International tier of the OTC Markets in
8
the U.S. (the “OTCQX”) under the symbols HARV and HRVSF, respectively. The stock price between the CSE and the OTCQX are identical after the U.S./Canadian currency exchange conversion.
2. Significant Accounting Policies
(a) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, our condensed consolidated financial statements do not include all the information and footnotes required by GAAP for complete financial statements. Normal and recurring adjustments considered necessary for a fair statement of the results for the interim periods, in the opinion of the Company's management, have been included. Operating results for the three months ended March 31, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The accompanying condensed consolidated financial statements and related footnote disclosures should be read in conjunction with the consolidated financial statements and notes thereto included in our 2020 Annual Report on Form 10-K filed with the SEC on March 30, 2021.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from the estimates and assumptions used.
(b) Basis of Measurement
These unaudited condensed consolidated financial statements have been prepared on the going concern basis, under the historical cost convention, except for certain financial instruments that are measured at fair value as described herein.
(c) Functional Currency
These unaudited condensed consolidated financial statements are presented in United States dollars, which is also the functional currency of the Company and its affiliates.
(d) Basis of Consolidation
These unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2021 include the accounts of the Company, all wholly-owned and majority-owned subsidiaries in which the Company has a controlling voting interest and, when applicable, variable interest entities in which the Company has a controlling financial interest or is the primary beneficiary. Investments in affiliates where the Company does not exert a controlling financial interest are not consolidated.
Subsidiaries over which the Company has a controlling financial interest are fully consolidated from the date control commences until the date control ceases. All of the consolidated entities were under common control during the entirety of the periods for which their respective results of operations were included in the consolidated statements (i.e., from the date of their acquisition). All intercompany accounts and transactions have been eliminated on consolidation.
(e) Discontinued Operations
The Company followed Accounting Standard Codification ("ASC") 360, Property, Plant, an Equipment, and ASC 205-20, Discontinued Operations, to report assets held for sale and discontinued operations.
The Company classifies assets and liabilities of a business or asset group as held for sale, and the results of its operations as income (loss) from discontinued operations, net, for all periods presented, when (i) we commit to a plan to divest a business or asset group, actively begin marketing it for sale, and when it is deemed probable of occurrence within the next twelve months, and (ii) when the business or asset group reflects a strategic shift that has, or will have, a major effect on the Company’s operations and its financial results. In measuring the assets and liabilities held for sale, the Company evaluates which businesses or asset groups are being marketed for sale.
See Note 4 for additional information.
(f) Revenue Recognition
The Company accounts for customer contracts in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”), which includes the following five-step model:
9
Identification of the contract, or contracts, with a customer.
Identification of the performance obligations in the contract.
Determination of the transaction price.
Allocation of the transaction price to the performance obligations in the contract.
Recognition of revenue when, or as, the Company satisfies a performance obligation.
Through application of the standard, the Company recognizes revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.
Revenues consist primarily of wholesale and retail sales of cannabis, which are generally recognized at a point in time when control over the goods have been transferred to the customer and is recorded net of sales discounts. Payment is typically due upon transferring the goods to the customer or within a specified time period permitted under the Company’s credit policy. Sales discounts were not material during the three months ended March 31, 2021 and 2020, respectively.
The Company has agreements in place whereby third-parties provide services or license the right to operate certain aspects of cannabis facilities owned by the Company. Under the terms of these agreements, the service provider operates various aspects of the business including procurement, production, regulatory compliance, marketing and sales, subject to oversight by the Company. The Company pays the service provider a fee for its services or in the case of licenses, the licensee pays the Company a license fee. The Company recorded $0.3 million and $6.4 million for the three months ended March 31, 2021 and 2020, respectively, on a gross basis. The determination that the Company was the principal under these agreements was made in accordance with ASC 606-10-55-36 through 55-40 and consists of the following analysis. The Company analyzed the agreements first to determine what the specified good or service is that is being provided. Secondly, whether the Company is in control of the goods prior to the goods being transferred to the customer. The specified goods consist of various cannabis products sold at either in a retail location or wholesale. In order to determine whether the Company had control of the specified goods prior to transfer to the customer, the terms of the agreements to provide the goods to the customers were evaluated. Pursuant to the terms of the agreements, the Company is at all times the owner of the products which is the marijuana and marijuana concentrates. Further, the service provider would not be able to sell the products to the customer without the use the of the Company’s license which permits it to sell marijuana under state law.
The following represents disaggregated revenue information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Retail
|
|
|
Wholesale
|
|
|
Licensing and other
|
|
|
Consolidated
|
|
|
Revenue for the three months ended March 31, 2021
|
|
$
|
77,648
|
|
|
$
|
9,293
|
|
|
$
|
1,885
|
|
|
$
|
88,826
|
|
|
Revenue for the three months ended March 31, 2020
|
|
$
|
30,012
|
|
|
$
|
6,065
|
|
|
$
|
8,158
|
|
|
$
|
44,235
|
|
3. Recently Adopted and Issued Accounting Pronouncements
We adopted the following standard during the three months ended March 31, 2021, which did not have a material impact on our financial statements or financial statement disclosures:
|
|
|
|
|
|
|
Date Issued
|
|
Standard
|
|
Effective Date
|
|
December 2019
|
|
ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes
|
|
January 2021
|
The following GAAP standards has been recently issued by the accounting standards board. The Company is assessing the impact of this new standard on future consolidated financial statements. Pronouncements that are not applicable or where it has been determined the pronouncements do not have a significant impact on the Company have been excluded herein.
|
|
|
|
|
|
|
Date Issued
|
|
Standard
|
|
Effective Date
|
|
August 2020
|
|
ASU No. 2020-06: Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) – Accounting for Convertible Instruments and contracts in an Entity's Own Equity
|
|
January 2022
|
10
4. Discontinued Operations
Following the completion of the merger with Interurban Capital Group, LLC (formerly Interurban Capital Group, Inc.) (“ICG”), the Company sold ICG to a wholly owned subsidiary of Hightimes Holding Corp. (“Hightimes”) following the spinoff of certain assets. At the time of disposition, ICG’s primary assets consisted of rights to acquire eight “Have A Heart”-branded cannabis dispensaries in California (the “California HAH Dispensaries”). In addition, the Company agreed to sell Hightimes the equity of two additional entities controlled by Harvest that are seeking cannabis dispensary licenses in California (the “Harvest Dispensaries”). As a result, assets and liabilities allocable to these operations were classified as held for sale. In addition, revenue and expenses, gains and losses relating to the discontinuation of the California HAH Dispensaries operations were eliminated from profit or loss from the Company’s continuing operations for all periods presented.
The Company also entered into a plan to abandon certain product lines or lines of business to include CBD products or items of inventory, and the Company’s planned expansion in the state of Michigan. Any related assets and liabilities are classified as held for sale. In addition, the revenue, expenses, gains and losses related to the discontinuation of these activities were eliminated from profit or loss from the Company’s continuing operations for all periods presented.
Discontinued operations are presented separately from continuing operations in the unaudited Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020. There was no material impact from discontinued operations to the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021.
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended March 31, 2020
|
|
|
Revenue, net of discounts
|
|
$
|
782
|
|
|
Cost of goods sold
|
|
|
(657
|
)
|
|
Gross profit
|
|
|
125
|
|
|
Expenses
|
|
|
|
|
General and administrative
|
|
|
325
|
|
|
Sales and marketing
|
|
|
22
|
|
|
Depreciation and amortization
|
|
|
18
|
|
|
Total expenses
|
|
|
365
|
|
|
Operating income (loss)
|
|
|
(240
|
)
|
|
Other (expense) income
|
|
|
|
|
Interest expense
|
|
|
(6
|
)
|
|
Loss before taxes and non-controlling interest
|
|
|
(246
|
)
|
|
Income taxes
|
|
|
(138
|
)
|
|
Loss from continuing operations before non-controlling interest
|
|
|
(384
|
)
|
|
Net loss from discontinued operations, net of tax
|
|
|
384
|
|
|
Net loss attributed to Harvest Health & Recreation Inc.
|
|
$
|
—
|
|
The following table is a summary of the assets and liabilities of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Inventory, net
|
|
$
|
93
|
|
|
$
|
93
|
|
|
Other current assets
|
|
|
33
|
|
|
|
33
|
|
|
Property, plant and equipment, net
|
|
|
1,747
|
|
|
|
1,747
|
|
|
Right-of-use asset, net
|
|
|
3,593
|
|
|
|
3,593
|
|
|
Intangibles assets, net
|
|
|
894
|
|
|
|
894
|
|
|
Other assets
|
|
|
221
|
|
|
|
225
|
|
|
Assets from discontinued operations
|
|
$
|
6,581
|
|
|
$
|
6,585
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Lease liability, net of current portion
|
|
|
718
|
|
|
|
718
|
|
|
Liabilities from discontinued operations
|
|
$
|
718
|
|
|
$
|
718
|
|
11
5. Inventory
The Company’s inventory consisted of:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
|
Raw materials
|
|
$
|
15,284
|
|
|
$
|
12,632
|
|
|
Work in progress
|
|
|
6,729
|
|
|
|
5,634
|
|
|
Finished goods
|
|
|
24,604
|
|
|
|
19,718
|
|
|
Total inventory
|
|
|
46,617
|
|
|
|
37,984
|
|
|
Reserve
|
|
|
(1,424
|
)
|
|
|
(1,122
|
)
|
|
Total inventory, net
|
|
$
|
45,193
|
|
|
$
|
36,862
|
|
6. Notes Receivable
The Company's notes receivable consisted of:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
|
Secured promissory notes dated November 2020 in the principal amount of $12.0 million with a maturity date of November 9, 2025; monthly payments of $0.1 million, inclusive of principal and interest. Balloon payment of $8.4 million due at maturity. Interest rate of 7.5% per annum.
|
|
$
|
11,771
|
|
|
$
|
12,000
|
|
|
Secured promissory notes dated February 2020 through February 2021 in the principal amount of $13.7 million with maturity dates from August 2021 to February 2022; principal is due at maturity. Interest rates of 6 - 8% per annum, due at maturity.
|
|
|
13,732
|
|
|
|
13,471
|
|
|
Secured promissory notes, created from the CannaPharmacy acquisition, dated April and June of 2019 in the principal amount of $11.6 million with maturity dates in April and June of 2021; principal is due at maturity. Interest rate of 8% per annum, due quarterly.
|
|
|
456
|
|
|
|
456
|
|
|
Secured convertible promissory note, due from Falcon International Corp. ("Falcon") and subsidiaries, dated June 7, 2019 in the principal amount of up to $40.4 million with maturity date of June 6, 2022; principal is due at maturity. Interest rate of 4% per annum, due at maturity.(1)
|
|
|
—
|
|
|
|
25,525
|
|
|
Unsecured convertible promissory notes, due from Falcon and its subsidiaries, dated October 2018 through February 2019 in the principal amount of $24.5 million with maturity dates of August to November 2019; principal is due at maturity. Interest rate of 8% per annum, due at maturity.(1)
|
|
|
—
|
|
|
|
24,499
|
|
|
Secured revolving notes dated December 2018 through January 2019 in the principal amount of up to $30.0 million with maturity dates of December 2019 to February 2020; principal is due at maturity. Interest rates of 8.25 - 8.5% per annum with interest payments due monthly.(2)
|
|
|
3,581
|
|
|
|
3,581
|
|
|
Secured promissory notes dated February 2021 in the principal of up to $0.9 million with a maturity date of February 19, 2022; principal is due at maturity. Interest rate of 10.0% per annum with interest payments due monthly.
|
|
|
850
|
|
|
|
—
|
|
|
Gross notes receivable
|
|
|
30,390
|
|
|
|
79,532
|
|
|
Less: provision for impairment of notes receivable
|
|
|
(629
|
)
|
|
|
(29,713
|
)
|
|
Total notes receivable, net of allowance
|
|
|
29,761
|
|
|
|
49,819
|
|
|
Less: current portion of notes receivable
|
|
|
(18,725
|
)
|
|
|
(31,608
|
)
|
|
Notes receivable, long-term portion
|
|
$
|
11,036
|
|
|
$
|
18,211
|
|
(1)
These notes were settled as part of the Falcon Lawsuit settlement. $29.1 million of the provision for impairment of notes receivable related to these notes was written off in relation to this settlement. See Note 10 for additional information.
(2)
These notes are currently in default. The Company is negotiating a settlement agreement with the debtor and, at this time, expects to receive the full principal balance. The Company's provision for expected credit losses as of March 31, 2021 includes $0.3 million related to these notes.
12
Stated maturities of the notes receivable are as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
Expected Principal Payments
|
|
|
2021 (9 months)
|
|
$
|
11,240
|
|
|
2022
|
|
|
8,526
|
|
|
2023
|
|
|
728
|
|
|
2024
|
|
|
784
|
|
|
2025
|
|
|
9,112
|
|
|
|
|
$
|
30,390
|
|
7. Leases
The Company primarily leases space for corporate offices, retail, cultivation and manufacturing under non-cancellable operating leases with initial terms typically ranging from 1 to 20 years. The Company had one finance lease at March 31, 2021.
On January 11, 2021, the Company purchased a cultivation property located in Reading, Pennsylvania. The property consists of approximately 1.36 acres of land and close to 46,800 square feet of combined office and cultivation space. The purchase price of the property was $5.2 million and was considered a finance lease prior to the building purchase.
On January 20, 2021, the Company sold an industrial property totaling approximately 292,000 square feet for $23.8 million. Concurrent with the sale, Harvest entered into a triple net lease with Innovative Industrial Properties, Inc. (“IIP”) to lease back the property. The lease is for a term of 20 years with an extension option. At commencement, the Company was not reasonably certain to exercise the extension option. Harvest plans to continue to operate the property as a licensed cultivation and processing facility and expects to recover up to approximately $10.8 million in tenant improvements from IIP. The total proceeds for the transaction are expected to be approximately $34.6 million. The Company determined control of the assets transferred to IIP, the sale price represented the fair value of the underlying assets sold, and the Company does not have continuing involvement with the property sold other than a normal leaseback. The Company received net proceeds of $22.3 million from the sale, after deducting a security deposit of $1.2 million, other transactions costs of $0.3 million, and incurred a gain of $1.1 million.
The following table presents assets and liabilities within the Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
Lease and Classification
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Operating Leases:
|
|
(In thousands)
|
|
|
Right-of-use asset, net
|
|
$
|
104,485
|
|
|
$
|
66,464
|
|
|
Lease liability, current portion
|
|
$
|
2,203
|
|
|
$
|
3,041
|
|
|
Lease liability, net of current portion
|
|
$
|
103,629
|
|
|
$
|
64,232
|
|
|
|
|
|
|
|
|
|
|
Finance Leases:
|
|
|
|
|
|
|
|
Property, plant and equipment, net(1)
|
|
$
|
408
|
|
|
$
|
5,523
|
|
|
Other current liabilities
|
|
$
|
136
|
|
|
$
|
5,504
|
|
(1)
Finance lease assets are recorded net of accumulated amortization of less than $0.1 million as of March 31, 2021 and December 31, 2020, respectively.
The Company recognized the following amounts within the Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
(In thousands)
|
|
|
Operating lease expense
|
|
$
|
4,488
|
|
|
$
|
2,799
|
|
|
Interest on lease liabilities
|
|
$
|
4
|
|
|
$
|
3
|
|
|
Expenses related to short-term leases
|
|
$
|
209
|
|
|
$
|
463
|
|
|
Expenses related to variable payments
|
|
$
|
190
|
|
|
$
|
241
|
|
The Company's sublease income is immaterial.
13
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
(In thousands)
|
|
|
Operating cash flows from operating leases
|
|
$
|
3,626
|
|
|
$
|
2,311
|
|
|
Operating cash flows from finance leases
|
|
$
|
4
|
|
|
$
|
3
|
|
|
Financing cash flows from finance leases
|
|
$
|
44
|
|
|
$
|
11
|
|
The Company’s lease terms and discount rates were as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining term (in years):
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
|
Operating
|
|
|
14.4
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate:
|
|
|
|
|
|
|
|
Operating
|
|
|
12.33
|
%
|
|
|
9.84
|
%
|
|
Finance
|
|
|
10.00
|
%
|
|
|
10.00
|
%
|
The Company had one finance lease with a remaining term of less than 12 months and 21 months at March 31, 2021 and 2020, respectively.
8. Divestitures
In February 2020, the Company divested of non-operating retail and cultivation entities, primarily consisting of two entities that hold cannabis licenses and various real estate and equipment. In accordance with ASC 810-10-40, Derecognition, control ceased, and the Company deconsolidated its interest in the entities. A related party to the Company holds an interest of 49% which it recognized as an equity method investment due to the related party's significant influence. The carrying value of the assets was derecognized along with the corresponding recognition of the fair value of the equity method investment resulting in a gain of $3.2 million. In conjunction with the assets being deconsolidated, the Company issued a $12.0 million note receivable to the entities in exchange for the real property and other plant and equipment deconsolidated at the time. This resulted in an additional $8.7 million gain during the three months ended March 31, 2020.
9. Intangible Assets and Goodwill
Intangible assets, including goodwill, as of December 31, 2020 and March 31, 2021 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount (in thousands)
|
|
Weighted average useful lives (years)
|
|
December 31,
2020
|
|
|
Additions
|
|
|
Dispositions/
Adjustments
|
|
|
March 31,
2021
|
|
|
Definite life intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient relationships
|
|
2.0
|
|
$
|
820
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
820
|
|
|
Technology
|
|
9.9
|
|
|
18,058
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,058
|
|
|
Software
|
|
5.0
|
|
|
241
|
|
|
|
155
|
|
|
|
(145
|
)
|
|
|
251
|
|
|
Other
|
|
3.0
|
|
|
410
|
|
|
|
253
|
|
|
|
—
|
|
|
|
663
|
|
|
Indefinite life intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses and permits
|
|
|
|
|
253,866
|
|
|
|
483
|
|
|
|
—
|
|
|
|
254,349
|
|
|
Internally developed
|
|
|
|
|
1,113
|
|
|
|
769
|
|
|
|
(293
|
)
|
|
|
1,589
|
|
|
Trade names
|
|
|
|
|
2,400
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,400
|
|
|
Total intangible assets
|
|
|
|
|
276,908
|
|
|
|
1,660
|
|
|
|
(438
|
)
|
|
|
278,130
|
|
|
Goodwill
|
|
|
|
|
116,041
|
|
|
|
—
|
|
|
|
135
|
|
|
|
116,176
|
|
|
Total gross carrying amount
|
|
|
|
$
|
392,949
|
|
|
$
|
1,660
|
|
|
$
|
(303
|
)
|
|
$
|
394,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization (in thousands)(1)
|
|
|
|
December 31,
2020
|
|
|
Amortization
|
|
|
Dispositions/
Adjustments
|
|
|
March 31,
2021
|
|
|
Definite life intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient relationships
|
|
|
|
$
|
820
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
820
|
|
|
Technology
|
|
|
|
|
3,913
|
|
|
|
464
|
|
|
|
8
|
|
|
|
4,385
|
|
|
Software
|
|
|
|
|
57
|
|
|
|
3
|
|
|
|
(21
|
)
|
|
|
39
|
|
|
Total accumulated amortization
|
|
|
|
|
4,790
|
|
|
|
467
|
|
|
|
(13
|
)
|
|
|
5,244
|
|
|
Total intangible assets, net and goodwill
|
|
|
|
$
|
388,159
|
|
|
$
|
1,193
|
|
|
$
|
(290
|
)
|
|
$
|
389,062
|
|
14
(1)
Amortization expense for Other intangible assets was less than $0.1 million during the three months ended March 31, 2020.
Intangible assets with definite lives are amortized over their estimated useful lives. The Company recorded amortization expense of $0.5 million included in depreciation and amortization, in the Condensed Consolidated Statements of Operations, for both the three months ended March 31, 2021 and 2020. Amortization periods for assets with definite lives are based on management's estimates at the date of acquisition.
Based solely on the amortizable intangible assets recorded at March 31, 2021, estimated amortization expense for the remainder of fiscal 2020 through fiscal 2025 and thereafter is as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
Estimated
Amortization
Expense
|
|
|
2021 (9 months)
|
|
$
|
1,675
|
|
|
2022
|
|
|
2,139
|
|
|
2023
|
|
|
2,039
|
|
|
2024
|
|
|
1,812
|
|
|
2025
|
|
|
1,791
|
|
|
Thereafter
|
|
|
5,092
|
|
|
Total amortization expense
|
|
$
|
14,548
|
|
Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, changes in useful lives, impairment charges or other relevant factors or changes.
10. Corporate Investments
The carrying values of the Company's investments are as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
|
Investment in Hightimes
|
|
$
|
19,091
|
|
|
$
|
19,091
|
|
|
Investment in Falcon
|
|
|
21,833
|
|
|
|
—
|
|
|
Corporate investments
|
|
$
|
40,924
|
|
|
$
|
19,091
|
|
The Company is not able to readily determine the fair value of either of the Company's equity investments listed in the table above. The investments are therefore accounted for under the measurement alternative whereby the investments are held at cost and adjusted for impairments and observable price changes, if any.
On March 13, 2021, the Company settled a lawsuit with Falcon International, Inc. ("Falcon") whereby the Company received 10% equity ownership in Falcon and each share received came with a 10-year warrant to acquire two common shares of Falcon at an exercise price of $1.91 per warrant. In exchange, the Company settled the $50.0 million of notes receivable, including accrued interest receivable, due from Falcon. Based on the net book value of the notes receivable settled, the Company estimated the fair value of the equity and warrants received to be $21.8 million at settlement.
On June 22, 2020, the Company sold a wholly owned subsidiary to a subsidiary of Hightimes following the spinoff of certain assets. Consideration received by the Company included 600,000 of Series A Preferred Stock. The Series A Preferred Stock has a stated or liquidation value of $100 per share. The Company may convert all or a portion of the Series A Preferred Stock into shares of Hightimes Class A voting Common Stock at a conversion price per share of $11, subject to adjustment to $1 per share, based on the 11-for-one forward stock split of the Hightimes Common Stock to be consummated upon completion of Hightimes’ Regulation A+ initial public offering; provided, that in no event shall the number of shares of Hightimes Common Stock issuable upon full conversion of the Series A Preferred Stock, exceed 19% of the issued and outstanding shares of Hightimes Common Stock, after giving effect to such optional conversion. Based on the assets transferred, the Company estimated the fair value of the shares of Series A Preferred Stock received to be $19.1 million when the sale closed.
No impairments or observable price changes were identified during the three months ended March 31, 2021.
15
11. Other Current Liabilities
The Company's other current liabilities consisted of:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
|
Accrued inventory purchases
|
|
$
|
8,346
|
|
|
$
|
7,886
|
|
|
Accrued expenses
|
|
|
7,323
|
|
|
|
5,607
|
|
|
Accrued interest payable
|
|
|
6,428
|
|
|
|
369
|
|
|
Accrued payroll and benefits
|
|
|
4,604
|
|
|
|
4,353
|
|
|
Accrued capital expenditures
|
|
|
2,436
|
|
|
|
3,133
|
|
|
Finance lease liabilities(1)
|
|
|
136
|
|
|
|
5,504
|
|
|
Other
|
|
|
5,675
|
|
|
|
2,044
|
|
|
Total other current liabilities
|
|
$
|
34,948
|
|
|
$
|
28,896
|
|
(1)
See Note 7 for additional information.
12. Notes Payable
The Company's notes payable consisted of:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
|
Secured promissory note dated March 2020, in the principal amount of $10.0 million with a maturity of March 2022. Monthly interest payments of 9% per annum. Principal balance due at maturity.(1)
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
|
Unsecured promissory note dated February 2020, in the principal amount of $6.7 million with a maturity of February 2023. Monthly interest payments at 4% per annum. Annual payments of $2.2 million, inclusive of interest at 4%, due beginning February 2021 with remaining principal due at maturity.
|
|
|
4,699
|
|
|
|
6,650
|
|
|
Secured promissory notes dated December 2019, in the principal amount of $93.4 million with a maturity of December 2022. Semi-annual interest payments at 15% per annum. Principal balance due at maturity.(2)
|
|
|
93,390
|
|
|
|
93,390
|
|
|
Secured promissory notes dated December 2019, in the principal amount of $42.4 million with a maturity of December 2022. Semi-annual interest payments at 9.25% per annum. Principal balance due at maturity.(3)
|
|
|
42,404
|
|
|
|
42,404
|
|
|
Secured convertible promissory note dated December 2019, in the principal amount of $10.0 million with a maturity of December 2021. Semi-annual interest payments at 9% per annum. Principal balance due at maturity.(4)
|
|
|
10,000
|
|
|
|
10,000
|
|
|
Secured promissory notes dated October 2019, in the principal amount of $6.5 million with a maturity of October 2021. Monthly interest payments at 8.95% per annum. Principal balance due at maturity.
|
|
|
6,500
|
|
|
|
6,500
|
|
|
Secured promissory notes dated September and October 2019, in the principal amount of $2.6 million with maturities of October 2024. Monthly interest payments at 5.5% and 8.75% per annum. Principal balance due at maturity.(5)
|
|
|
2,480
|
|
|
|
2,505
|
|
|
Secured promissory note dated June 2019, in the principal amount of $4.0 million with a maturity of June 2024. Interest at LIBOR plus 2.5% per annum, payable monthly. Principal balance due based on 25-year amortization schedule with balloon payment at maturity.(6)
|
|
|
3,925
|
|
|
|
4,000
|
|
|
Unsecured convertible debentures dated May 2019, in the principal amount of $100.0 million with a maturity of May 2022. Semi-annual interest payments at 7% per annum. Principal balance due at maturity.(7)
|
|
|
100,000
|
|
|
|
100,000
|
|
|
Other unsecured promissory notes
|
|
|
5,200
|
|
|
|
4,039
|
|
|
Other secured promissory notes
|
|
|
4,787
|
|
|
|
1,275
|
|
|
Total notes payable
|
|
|
283,385
|
|
|
|
280,763
|
|
|
Less: unamortized debt discounts and issuance costs
|
|
|
(13,626
|
)
|
|
|
(15,787
|
)
|
|
Net amount
|
|
|
269,759
|
|
|
|
264,976
|
|
|
Less: current portion of notes payable
|
|
|
(29,713
|
)
|
|
|
(20,910
|
)
|
|
Notes payable, net of current portion
|
|
$
|
240,046
|
|
|
$
|
244,066
|
|
16
(1)
Carrying value includes debt discount of $0.7 million.
(2)
Carrying value includes debt issuance costs of $2.6 million.
(3)
Carrying value includes debt issuance costs of $1.3 million and warrants of $3.6 million.
(4)
Carrying value includes debt discount of $0.4 million.
(5)
Carrying value includes debt issuance costs of $0.1 million.
(6)
Carrying value includes debt issuance costs of $0.1 million.
(7)
Carrying value includes debt issuance costs of $1.7 million and warrants of $3.1 million.
Stated maturities of debt obligations and expected interest payments are as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Expected Principal Payments
|
|
|
Expected Interest Payments
|
|
|
2021 (9 months)
|
|
$
|
20,156
|
|
|
$
|
27,598
|
|
|
2022
|
|
|
251,706
|
|
|
|
21,245
|
|
|
2023
|
|
|
5,328
|
|
|
|
461
|
|
|
2024
|
|
|
5,694
|
|
|
|
217
|
|
|
2025
|
|
|
501
|
|
|
|
19
|
|
|
|
|
$
|
283,385
|
|
|
$
|
49,540
|
|
13. Share-based Compensation
Stock options
During 2018, the Compensation Committee of the Company's Board of Directors approved a share-based compensation plan. The purpose of the plan is to promote the interests of the Company and its stockholders by aiding the Company in attracting and retaining employees, officers, consultants, advisors and non-employee directors capable of assuring the future success of the Company. The stock options granted are non-qualified and generally vest in 25% increments over a four-year period and expire 10 years from the grant date.
A summary of the status of the options outstanding follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Stock Options
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Balance as of December 31, 2020
|
|
|
14,380,875
|
|
|
$
|
5.02
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(1,536,375
|
)
|
|
|
7.23
|
|
|
|
|
|
Granted
|
|
|
553,500
|
|
|
|
4.08
|
|
|
|
|
|
Balance as of March 31, 2021
|
|
|
13,398,000
|
|
|
$
|
4.73
|
|
|
$
|
5,535,653
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on March 31, 2021, and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their in-the-money options on March 31, 2021. This amount will change in future periods based on the fair market value of the Company’s stock and the number of options outstanding.
The following table summarizes the Subordinate Voting Shares stock options that remain outstanding as of March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
Security Issuable
|
|
Expiration Date
|
|
Number of Stock Options
|
|
Exercise Price
|
|
Stock Options Exercisable
|
|
Subordinate Voting Shares
|
|
November 2028 - February 2031
|
|
13,398,000
|
|
$1.09 - $8.75
|
|
5,205,375
|
The following table summarizes the Subordinate Voting Shares stock options that remain outstanding as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Issuable
|
|
Expiration Date
|
|
Number of Stock Options
|
|
|
Exercise Price
|
|
Stock Options Exercisable
|
|
|
Subordinate Voting Shares
|
|
November 2028 - December 2030
|
|
|
14,380,875
|
|
|
$1.09 - $8.75
|
|
|
2,326,000
|
|
During the three months ended March 31, 2021 and 2020, the Company recorded $4.8 million and $13.8 million of share-based compensation expense for stock options granted and vested during the period, respectively.
17
The fair value of the stock options granted was determined using the Black-Scholes option-pricing model with the following weighted-average assumptions at the time of grant:
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Risk-Free Annual Interest Rate
|
|
2.25%
|
|
2.00% - 2.25%
|
|
Expected Annual Dividend Yield
|
|
0%
|
|
0%
|
|
Expected Stock Price Volatility
|
|
99%
|
|
83% - 99%
|
|
Expected Life of Stock Options
|
|
6.25 Years
|
|
6.25 Years
|
Volatility was estimated by using the average historical volatility of comparable companies from a representative peer group of publicly traded cannabis companies. The expected life represents the period of time that the options issued are expected to be outstanding. The risk-free rate is based on Government of Canada bond issues with a remaining term approximately equal to the expected life of the options.
During the three months ended March 31, 2021 and 2020, the weighted-average fair value of stock options granted was $3.26 and $2.21 per option, respectively. As of March 31, 2021 and 2020, stock options outstanding had a weighted-average remaining contractual life of 8.6 and 8.9 years, respectively. At March 31, 2021, the total unrecognized compensation cost related to the non-vested awards granted and expected to vest was $16.0 million. This cost is expected to be recognized over a weighted-average period of 2.1 years.
Restricted stock units
On December 31, 2020, the Company granted 208,348 restricted stock units. These restricted stock units vest in 2021. On April 6, 2020, the Company granted 98,765 restricted stock units. These restricted stock units vest throughout 2020 and 2021. The following table summarizes the status of the restricted stock units:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted Stock Units
|
|
|
Weighted-
Average
Grant Price
|
|
|
Balance as of December 31, 2020
|
|
|
241,273
|
|
|
$
|
2.01
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Vested
|
|
|
(76,778
|
)
|
|
|
1.73
|
|
|
Balance as of March 31, 2021
|
|
|
164,495
|
|
|
$
|
2.14
|
|
During the three months ended March 31, 2021, the Company recorded $0.1 million of share-based compensation expense for restricted stock units granted and vested during the period. No share-based compensation expense for restricted stock was recorded during the three months ended March 31, 2020.
14. Stockholders' Equity
Description of the company’s securities
The Company is authorized to issue an unlimited number of Subordinate Voting Shares (“SVS” or “Subordinate Voting Shares”), Multiple Voting Shares (“MVS” or “Multiple Voting Shares”) and Super Voting Shares, all with no par value. Each Multiple Voting Share converts into 100 Subordinate Voting Shares and each Super Voting Share converts into one Subordinate Voting Share. Holders of SVS are entitled to one vote in respect of each SVS held at stockholder meetings of the Company. Holders of MVS are entitled to 100 votes in respect of each MVS held at stockholder meetings of the Company. Holders of Super Voting Shares are entitled to 200 votes in respect of each Super Voting Share held at stockholder meetings of the Company.
Warrants
During the three months ended March 31, 2021, the Company issued 307,856 stock warrants to purchase the Company’s SVS. These warrants were issued upon exercise of compensation warrants held by underwriters of the bought deal completed by the Company on October 28, 2020. The company did not record any share-based compensation expense for stock warrants outstanding during the period. The stock warrants qualify for liability classification in accordance with ASC 815, Derivatives and Hedging.
A summary of the status of the stock warrants outstanding, on an as-converted basis for SVS, is as follows:
18
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Stock Warrants
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Balance as of December 31, 2020
|
|
|
24,407,114
|
|
|
$
|
4.11
|
|
|
Issued
|
|
|
307,856
|
|
|
|
2.40
|
|
|
Exercised
|
|
|
(3,253,712
|
)
|
|
|
1.78
|
|
|
Balance as of March 31, 2021
|
|
|
21,461,258
|
|
|
$
|
4.25
|
|
The following table summarizes the stock warrants that remain outstanding as of March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Issuable
|
|
Expiration Date
|
|
Number of Stock Warrants
|
|
|
Exercise Price
|
|
Stock Warrants Exercisable
|
|
|
Subordinate Voting Shares
|
|
May 2022 - December 2025
|
|
|
17,426,258
|
|
|
$2.43 - $14.45
|
|
|
17,426,258
|
|
|
Multiple Voting Shares
|
|
April 2021 - April 2023
|
|
|
40,350
|
|
|
$104.65
|
|
|
40,350
|
|
The following table summarizes the stock warrants that remain outstanding as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Issuable
|
|
Expiration Date
|
|
Number of Stock Warrants
|
|
|
Exercise Price
|
|
Stock Warrants Exercisable
|
|
|
Subordinate Voting Shares
|
|
May 2022 - April 2023
|
|
|
18,872,114
|
|
|
$2.40 - $14.27
|
|
|
18,872,114
|
|
|
Multiple Voting Shares
|
|
April 2021 - April 2023
|
|
|
55,350
|
|
|
$103.36
|
|
|
55,350
|
|
The fair value of the stock warrants granted was determined using the Black-Scholes option-pricing model with the following weighted-average assumptions at the time of issuance:
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Risk-Free Annual Interest Rate
|
|
0.11% - 0.16%
|
|
2.15%
|
|
Expected Annual Dividend Yield
|
|
0%
|
|
0%
|
|
Expected Stock Price Volatility
|
|
95%
|
|
70% - 99%
|
|
Expected Term
|
|
2.2 - 2.3 Years
|
|
1.0 - 5.0 years
|
Expected volatility was estimated by using the Company’s historical share price volatility for a period similar to the expected life of the warrants. The expected term represents the period of time that the stock warrants issued are expected to be outstanding. The risk-free interest rate, using the expected life of the warrants, is based on the U.S. Treasury yield curve in effect at the time of issuance.
The fair value of the stock warrants granted was determined using the Black-Scholes option-pricing model with the following weighted-average assumptions at March 31, 2021:
|
|
|
|
|
Risk-Free Annual Interest Rate
|
|
0.01% - 0.92%
|
|
Expected Annual Dividend Yield
|
|
0%
|
|
Expected Stock Price Volatility
|
|
84% - 114%
|
|
Expected Term
|
|
0.1 - 4.8 years
|
During the three months ended March 31, 2021 and 2020, the fair value of the stock warrants granted was $2.35 and $1.19 per warrant, respectively. As of March 31, 2021 and 2020, stock warrants outstanding have a weighted-average remaining contractual life of 1.6 and 2.2 years, respectively.
Warrants exercised for cash
During the three months ended March 31, 2021, the Company issued 15,000 MVS and 2,369,422 SVS as a result of warrant exercises (including 615,710 SVS issued in relation to compensation warrants exercised) and received cash proceeds of approximately $6.8 million.
Shares held in escrow
As of March 31, 2021, the Company has 2,000,000 SVS held in escrow to be released on the achievement of certain milestones. The conditions for release were not met as of March 31, 2021. The shares are non-employee compensation for raising equity.
19
The following presents the total outstanding SVS if converted as of March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Class
|
|
Number of
Shares at
March 31,
2021
|
|
|
Conversion
Factor
|
|
|
Total
Subordinated
Voting
Shares if
Converted
|
|
|
Super Voting Shares
|
|
|
2,000,000
|
|
|
|
1
|
|
|
|
2,000,000
|
|
|
Multiple Voting Shares
|
|
|
1,636,065
|
|
|
|
100
|
|
|
|
163,606,500
|
|
|
Subordinate Voting Shares
|
|
|
245,336,531
|
|
|
|
1
|
|
|
|
245,336,531
|
|
|
Total
|
|
|
|
|
|
|
|
|
410,943,031
|
|
15. Net Loss Per Share
Calculation of net loss per common share attributable to Harvest Health & Recreation Inc. is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended March 31,
|
|
|
(In thousands, except share and per share data)
|
|
2021
|
|
|
2020
|
|
|
Net loss attributable to Harvest Health & Recreation Inc.
|
|
$
|
(23,122
|
)
|
|
$
|
(15,384
|
)
|
|
Net loss attributable to discontinued operations, net of tax
|
|
$
|
—
|
|
|
$
|
(384
|
)
|
|
Basic weighted-average number of shares outstanding
|
|
|
407,632,006
|
|
|
|
304,179,427
|
|
|
Net loss per share attributable to Harvest Health & Recreation Inc. - basic and diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
Net loss per share attributable to discontinued operations, net of tax
|
|
$
|
—
|
|
|
$
|
—
|
|
As the Company is in a loss position for both the three months ended March 31, 2021 and 2020, the inclusion of shares issuable upon exercise of stock options, vesting of restricted stock, exercise of warrants, and conversion of debt in the calculation of diluted earnings per share would be anti-dilutive and, accordingly, were excluded from the diluted loss per share calculation. The weighted-average number of shares outstanding assumes the conversion of all MVS and Super Voting Shares to SVS.
The following table summarizes the potential SVS that were excluded as they were anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Stock options and restricted stock units
|
|
|
13,562,495
|
|
|
|
19,354,750
|
|
|
Warrants(1)
|
|
|
22,216,904
|
|
|
|
9,150,996
|
|
|
Convertible debt
|
|
|
12,183,868
|
|
|
|
32,041,357
|
|
|
|
|
|
47,963,267
|
|
|
|
60,547,103
|
|
(1)
Includes the outstanding compensation warrants issued for underwriting services in the October 2020 bought financing.
16. Commitments and Contingencies
Regulatory environment
The Company’s operations are subject to a variety of local and state regulation. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits or licenses that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulation as of March 31, 2021, marijuana regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties, or restrictions in the future.
Contingencies
Claims & legal proceedings
From time to time, the Company may be involved in legal proceedings, including litigation or regulatory proceedings relating to claims arising out of operations in the normal course of business. In accordance with the current accounting standards for loss contingencies under ASC Topic 450, we establish reserves for litigation-related matters that arise from the ordinary course of our business activities
20
when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss can be reasonably estimated. Litigation claims and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with assurance. By their nature, the amount of the contingency and the timing of a contingent event and any resulting accounting recognition are subject to our judgment of such events and our estimates of the amounts. Below we provide a description of potentially material legal proceedings and claims.
Falcon International, Inc.
On January 6, 2020, the Company terminated the Agreement and Plan of Merger and Reorganization entered into among the Company, Harvest California Acquisition Corp., Falcon International Corp. and its shareholders dated February 14, 2019, as amended (the “Falcon Merger Agreement”). The Falcon Merger Agreement was terminated as a result of defaults by Falcon and its shareholders incapable of being cured, and other improper conduct of Falcon and its principal officers and directors, James Kunevicius and Edlin Kim. On January 6, 2020, the Company also filed suit in the U.S. District Court for the District of Arizona (Case No. 2:20-cv-00035-DLR) (the “Falcon Lawsuit”), which identified the grounds for termination and sought a court order compelling Falcon and its shareholders to arbitrate the Company’s claims. On February 7, 2020, an Amended Complaint was filed as a matter of course, providing greater specificity after certain defendants filed a motion to dismiss. On February 26, 2020, Falcon, its subsidiaries, and its founders all stipulated to the relief sought by the Amended Complaint, to refer the matter to binding, private arbitration before the American Arbitration Association (“AAA”).
On March 6, 2020, the U.S. District Court for the District of Arizona ordered the parties to the stipulation to binding, private arbitration of the matter before the AAA. The remedies the Company seeks in the AAA arbitration include rescission and/or termination of the Falcon Merger Agreement, all agreements entered into in connection with the Falcon Merger Agreement and the “Control Person Transaction” discussed below, an award of restitutionary damages from Falcon and its shareholders including repayment of funds advanced pursuant to promissory notes issued by Falcon and its subsidiaries in connection with the Falcon Merger Agreement, appointment of a receiver for Falcon and an award of attorneys’ fees, arbitration forum fees and costs. Remedies sought by the Company in arbitration also include rescission and/or termination remedies concerning the “Control Person Transaction” referenced in that certain Membership Interest Purchase Agreement entered into among James Kunevicius and Edlin Kim (collectively, the “Selling Owners”), Elemental Concepts, LLC and Compass Point, LLC (the “Sellers”) and Harvest of California, LLC (a wholly owned subsidiary of the “Company”) dated June 7, 2019 (the “MIPA”). Pursuant to the terms of the MIPA, the Company purchased 100% of the membership interests in two entities that hold commercial cannabis licenses in California (the “Purchased Interests”) for a purchase price of $4.1 million (the “Purchase Price”). These remedies include seeking an order which would effectively require the equivalent of the Selling Owners and the Sellers being required to repurchase from the Company all of the Purchased Interests for an amount equal to the Purchase Price as provided for in the MIPA.
On July 2, 2020, Falcon and two of its shareholders filed a counterclaim against the Company in the AAA arbitration proceeding. The counterclaim alleges that the Company breached the Falcon Merger Agreement, breached an implied covenant of good faith and fair dealing and intentionally interfered with Falcon’s prospective business relations and seeks monetary damages of $50.0 million pursuant to the Falcon Merger Agreement. On March 13, 2021, the parties entered into a binding settlement agreement, resulting in a final dismissal of all litigation and arbitration between them arising out of the 2019 merger agreement. In accordance with the settlement terms, Harvest owns a 10% equity interest in Falcon. Each share comes with a 10-year warrant entitling Harvest to purchase two (2) common shares of Falcon at an exercise price of $1.91, subject to customary anti-dilution adjustments in the event of stock splits, stock dividends and similar corporate events. See Note 10 for additional information.
AGRiMED Industries of PA, LLC
The Company appealed the Commonwealth of Pennsylvania Department of Health (“PDOH”), June 2019 denial of the renewal of a grower/processor permit issued to AGRiMED Industries of PA, LLC (“AGRiMED”) which the Company acquired through a Membership Interest Purchase Agreement on May 20, 2019. On August 28, 2019, AGRiMED filed a timely Notice of Appeal with the PDOH Docket No. 19-068 GP on the grounds that, among other things, the PDOH is equitably estopped and abused its discretion in refusing to renew AGRiMED’s permit, given AGRiMED’s recent change in ownership, the PDOH’s awareness of that change, and the limited scope of AGRiMED’s operations at the time of the non-renewal, of which the PDOH was similarly aware. Further, AGRiMED asserted that the PDOH had failed to provide AGRiMED with an opportunity to respond to or otherwise cure or correct any alleged violations identified by the PDOH. On May 6, 2021 the PDOH entered into a settlement agreement regarding the AGRiMED permit which allows for the conditional renewal of the permit and its operation by the Company as early as August 15, 2021.
The AGRiMED permit is still subject to litigation from a third-party seeking revocation of the permit. The possible revocation is related to an administrative challenge filed by Bay LLC, which was the next highest scoring applicant when AGRiMED was awarded a permit. Bay LLC’s objection to the award of the AGRiMED permit is due to the fact that one of AGRiMED’s principals (pre-Harvest’s MIPA to operate the permit) failed to disclose a criminal conviction on the AGRiMED application. On November 9, 2020, the PDOH Deputy Secretary ruled that the AGRiMED permit should not be revoked based upon an equitable estoppel theory. On December 3, 2020 Bay
21
LLC filed a Petition for Review of the November 9, 2020 PDOH determination in the Pennsylvania Commonwealth Court. Briefing of that appeal is expected to be complete in May 2021.
Rainbow lease and real estate litigation
On June 4, 2020, Rainbow HAH Council Bluffs LLC, Rainbow HAH Santa Cruz LLC, Rainbow HAH Coalinga LLC and Rainbow Realty Group LLC (collectively, the “Plaintiffs”) filed a complaint in the Supreme Court of the State of New York, County of Nassau (Index No.: 605323/2020) against the Company and certain of its subsidiaries and certain of its current officers and directors, including Scott Atkison (the “Harvest Defendants”), ICG and certain of its subsidiaries, Hightimes Holding Corp. and one of its subsidiaries, Ryan Kunkel (“Kunkel”) and James Dennedy (“Dennedy”). Mr. Atkison is a former shareholder and director of ICG and is a party to the Agreement and Plan of Merger and Reorganization, dated March 13, 2020, between a wholly-owned subsidiary of the Company and ICG (the “ICG Merger Agreement”) and as result thereof, he, along with other former ICG shareholders including Daniel Reiner, a shareholder of the Company the beneficial owner of greater than 5% of our equity securities, may have indemnification obligations to the Company. On September 24, 2020, the Plaintiffs filed an amended complaint (the “Amended Rainbow Complaint”). The Amended Rainbow Complaint alleges, among other things, that the Plaintiffs were fraudulently induced by Kunkel and Dennedy and aided and abetted by the Harvest Defendants into paying $3.5 million to purchase three cannabis dispensaries that were leased by Have a Heart branded dispensaries in Council Bluffs, Iowa, Coalinga, California and Santa Cruz, California (the “Gerra Properties”). The properties were sold to the Plaintiffs by Gerra Capital Management which was owned and controlled by certain former ICG directors and shareholders which included Kunkel and Dennedy. The Amended Rainbow Complaint alleges breach of lease, breach of guaranty, breach of the implied covenant of good faith and fair dealing, fraud in the inducement, conspiracy to commit fraud, aiding and abetting fraud, violations of debtor creditor law and piercing the corporate veil (the “Rainbow Litigation”).
The Rainbow Litigation is in the pleading stage of litigation. In December 2020, the case transferred to the Commercial Division of the Supreme Court of the State of New York, County of New York (Index No.: 452625/2020). According to a stipulation between the parties, the Harvest Defendants were scheduled to respond to the Amended Rainbow Complaint by April 5, 2021. No discovery has commenced. The Harvest Defendants are prepared to vigorously defend themselves and believe that the allegations against them lack merit. Nevertheless, the Harvest Defendants are working on a settlement agreement with the Plaintiffs which would obviate the need for a response to the Amended Complaint. The Company is evaluating potential claims against the former stockholders of ICG pursuant to the ICG Merger Agreement, Kunkel, Dennedy and the other owners of the Gerra Properties, some of whom are former ICG directors and shareholders.
Litigation assessment
The Company has evaluated its claims and the foregoing matters to assess the likelihood of any unfavorable outcome and to estimate, if possible, the amount of potential loss as it relates to the litigation discussed above. Based on this assessment and estimate, which includes an understanding of the Company’s intention to vigorously prosecute its claims, the Company believes that any defenses of any of the counterparties lack merit, and the likelihood of any recoveries by any of the counterparties against the Company appears remote. This assessment and estimate is based on the information available to management as of the date of these financial statements and involves a significant amount of management judgment, including the inherent difficulty associated with assessing litigation matters in their early stages. As a result, the actual outcome or loss may differ materially from those envisioned by the current assessment and estimate. Our failure to successfully prosecute or settle these claims could have a material adverse effect on our financial condition, revenue and profitability and could cause the market value of our subordinate voting shares to decline.
17. Income Taxes
The Company accounts for income taxes in accordance with the provisions of ASC 740, Income Taxes (“ASC 740”), on a tax jurisdictional basis. The Company files a consolidated as well as several standalone company U.S. income tax returns and, at the federal level, its gross profits or income and losses are taxed at 21%. The Company's effective tax rate varies from the U.S. Federal statutory rate due to permanent non-deductible IRS Section 280e differences, pass-through entities, and non-controlling interests. The Company recorded income tax expense of $6.5 million and $3.8 million for the three months ended March 31, 2021 and 2020, respectively
The net deferred income tax liability was $53.1 million as of both March 31, 2021 and December 31, 2020 and consists primarily of future tax impacts of the book and tax differences in fixed asset depreciation and intangibles acquired through purchase accounting.
During the three months ended March 31, 2021 and 2020, respectively, the Company recognized an immaterial amount of interest and penalties. The Company has not established valuation allowances against any U.S. Federal or state deferred tax assets.
18. Related Party Transactions
Related party notes receivable
22
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
|
Secured promissory notes dated February 2020(1)
|
|
$
|
6,732
|
|
|
$
|
6,471
|
|
|
Secured revolving notes dated December 2018 through January 2019(2)
|
|
|
3,581
|
|
|
|
3,581
|
|
|
Total due from related party (current portion notes receivable)
|
|
$
|
10,313
|
|
|
$
|
10,052
|
|
(1)
Secured promissory note dated February 2020, and amended February 2021, in the aggregate principal amount of $6.7 million with maturity date February 2022; principal is due at maturity. Interest rate of 6% per annum, due at maturity. The secured note of $6.7 million is due from Harvest of Ohio LLC, an Ohio limited liability company owned 49% by Steve White, the Chief Executive Officer of the Company, and an entity in which the Company has an investment interest. The Company accounts for the investment interest under the equity method. During the three months ended March 31, 2021 and 2020, interest income was $0.1 million and less than $0.1 million, respectively.
(2)
Secured revolving notes dated December 2018 through January 2019 in the aggregate principal amount of $3.6 million which are due from AINA We Would LLC, the borrower, of which Harvest owns a 25% interest. The notes mature between December 2019 and February 2020 and the principal is due at maturity. The secured revolving notes which mature between December 2019 and February 2020 are currently in default. The Company is negotiating a settlement agreement with the debtor and, at this time, expects to receive the full principal balance. The secured revolving notes have interest rates of 8.25 - 8.5% per annum with interest payments due monthly. AINA We Would LLC can draw up to $30.0 million, with each advance subject to the approval of AINA We Would LLC and the Company in their sole discretion. No interest income was recorded during the three months ended March 31, 2021 and $0.1 million of interest income was recorded during the three months ended March 31, 2020.
Related party leases
Included in the Condensed Consolidated Balance Sheets are the following amounts recorded for leases with related parties:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
|
Right-of-use assets for operating leases, net
|
|
$
|
5,564
|
|
|
$
|
5,621
|
|
|
Operating lease liability, current portion
|
|
|
(142
|
)
|
|
|
(135
|
)
|
|
Operating lease liability, net of current portion
|
|
|
(5,557
|
)
|
|
|
(5,595
|
)
|
AZRE2, LLC owns a building located at 300 East Cherry Street, Cottonwood, Arizona 86326, which it leases to Harvest to use as a cultivation facility. The lease commenced on August 1, 2019 for a 15 year term and rent payments were approximately $0.1 million for both the three months ended March 31, 2021 and 2020. The Company incurred rent expense of $0.1 million in relation to this lease for both the three months ended March 31, 2021 and 2020. Jason Vedadi, the former Chairman of the Board of Harvest, is the sole owner of AZRE2, LLC. $1.4 million is due to Karma Capital, LLC, an entity wholly owned by Mr. Vedadi, to pay back the loan given to purchase the Cottonwood property.
Karma Capital, LLC owns a building located at 2726-2734 E. Grant Road Tucson, Arizona 85716, which it leases to Harvest to use as a dispensary. The lease commenced on July 1, 2017 for a 15 year term and rent payments were less than $0.1 million for both the three months ended March 31, 2021 and 2020. The Company incurred rent expense of less than $0.1 million in relation to this lease for both the three months ended March 31, 2021 and 2020. Mr. Vedadi, the former Chairman of the Board of Harvest, is the sole owner of Karma Capital, LLC.
Earbuds, LLC owns a building located at 4370 Tonawanda Trail Beaver Creek, Ohio 45430, which it leases to Harvest to use as a dispensary. The lease commenced on April 1, 2020 for a 15 year term and rent payments were less than $0.1 million for the three months ended March 31, 2021. There was also an additional fee paid of approximately $0.1 million provided to the landlord for previous costs incurred to purchase the building in 2020. The Company incurred rent expense of less than $0.1 million in relation to this lease for the three months ended March 31, 2021. Each of Mr. Vedadi, the former Chairman of the Board of Harvest, Joseph Sai, Harvest’s Chief of Staff and Howard Hintz, Harvest’s former Director of Contracts, are partners of Earbuds, LLC. Each of the three partners of Earbuds, LLC are entitled to an equal distribution share of the accrued rental income. $0.4 million is due to SMRE LLC (an entity owned by Mr. Sai), Things Change LLC (an entity owned by Mr. Hintz) and TJV-168 LLC (an entity owned by Mr. Vedadi) to pay back the loan given to purchase the Beaver Creek, OH property. Each partner loaned $0.1 to Earbuds, LLC to acquire the property.
On February 9, 2021, we cancelled 2,545 Multiple Voting Shares held by Touraj Jason Vedadi in exchange for extinguishing our right of first refusal under the Separation Agreement (as more fully described and qualified by reference to Exhibit 10.1 of this Quarterly Report on Form 10-Q, Amendment to Separation Agreement and General Release, by and between Jason Vedadi and Harvest Health & Recreation Inc., dated February 9, 2021). The number of Multiple Voting Shares is equal to an aggregate market value of $1,000,185 divided by the closing sales price of the Subordinate Voting Shares on February 5, 2021, which was $3.93. The Multiple Voting Shares
23
were convertible to Subordinate Voting Shares on a 1:100 basis. This transaction with Mr. Vedadi is a transaction agreed with an “insider” and is considered to be a “related party transaction.”
19. Subsequent Events
Arrangement Agreement
On May 10, 2021, Harvest entered into an arrangement agreement (the “Arrangement Agreement”) with Trulieve Cannabis Corp., a British Columbia corporation (“Trulieve”), pursuant to which Trulieve will acquire all of the issued and outstanding subordinate voting shares, multiple voting shares and super voting shares of Harvest, with the multiple voting shares and super voting shares being treated on an as if converted basis to Trulieve subordinate voting shares pursuant to their respective terms. Under the terms of the Arrangement Agreement, shareholders of Harvest will receive 0.1170 of a subordinate voting share of Trulieve, as may potentially be adjusted upon the occurrence of certain permitted Harvest debt re-financings (each whole subordinate voting share of Trulieve, a “Trulieve Share”) for each Harvest subordinate voting share (or equivalent), representing total consideration of approximately $2.1 billion based on the closing price of the Trulieve Shares on May 7, 2021.
Acquisition of GreenMart of Nevada
On December 31, 2019, the Company, through a wholly owned indirect subsidiary, entered into a definitive agreement to acquire GreenMart of Nevada, LLC, a wholly owned, indirect subsidiary of MJardin Group, Inc., to acquire 100% of the membership interests of GreenMart. $5.0 million of contingent consideration, payable upon closing of the acquisition and license transfer, was paid, net of agreed upon discount, to the seller on April 30, 2021.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results should be read in conjunction with the financial statements and accompanying notes in this report.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements that we believe are, or may be considered to be, “forward-looking statements.” All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q regarding the prospects of our industry or our prospects, plans, financial position or business strategy may constitute forward- looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking words such as “may,” “will,” “expect,” “intend,” “estimate,” “foresee,” “project,” “anticipate,” “believe,” “plan,” “forecast,” “continue” or “could” or the negative of these terms or variations of them or similar terms. Furthermore, forward-looking statements may be included in subsequent annual, quarterly and other filings that we make with the United States Securities and Exchange Commission (the “SEC”) and Canadian securities regulators or press releases or oral statements made by or with the approval of one of our authorized executive officers. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that these expectations will prove to be correct. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. These include, but are not limited, to the material risks described more fully in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC and Canadian securities regulators on March 30, 2021, in Item 1A of this Quarterly Report on Form 10-Q, and in our subsequent filings in the U.S and Canada. All such risk factors are difficult to predict accurately and are generally beyond the direct control of the registrant. Readers are cautioned not to place undue reliance on any forward-looking statements contained in this Quarterly Report on Form 10-Q, which reflect management’s opinions only as of the date hereof. Forward-looking statements in this Quarterly Report on Form 10-Q, other than the statements regarding the proposed arrangement with Trulieve Cannabis Corp. (“Trulieve”), do not assume the consummation of such proposed arrangement unless specifically stated otherwise. Except as required by law, we undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements. You are advised, however, to consult any subsequent disclosures we make in our reports to the SEC and Canadian securities regulators. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in our Annual Report on Form 10-K for the year ended December 31, 2020, this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, and our subsequent filings in the U.S. and Canada.
Numerous factors could cause our actual results to differ materially from those described in such forward-looking statements, including, among other things:
24
There are various risks associated with the proposed arrangement with Trulieve which could impact our business operations, financial results and share price, including without limitation, the failure to complete or delays in completing the arrangement, termination of the arrangement, the payment of termination amounts in certain circumstances, the fixed nature of the deal consideration (subject to potential downward adjustment upon the occurrence of certain permitted Harvest debt re-financings), and fluctuations in Trulieve's stock price.
Actions taken against us by the U.S. federal government for participation in the cannabis industry, as marijuana remains illegal under U.S. federal law.
Changes in the regulation of the cannabis industry at the U.S. federal, state, or local level.
Increased or heightened scrutiny by United States and Canadian authorities due to the industry in which we operate.
The uncertain application of laws and regulations that impact our operations owing to the legal status of cannabis.
Our ability to fully comply with applicable regulatory requirements in the jurisdictions where we carry on our business.
The results of future clinical research may be unfavorable to cannabis which may have a material adverse effect on the demand for our products.
The accuracy of various articles, reports and studies that support our beliefs regarding the medical benefits, viability, safety, efficacy and dosing of cannabis, and the impact of such reports on consumer perceptions.
Inconsistent public opinion and perception of the medical and adult-use use cannabis industry hinders market growth and state adoption.
The expansion of our cultivation facilities to support product sales in retail and wholesale channels.
Our continued success in improving product yield in our current and future growing facilities.
Our financial statements have been prepared on the going concern basis and we have incurred net losses in each of our past three fiscal years, we cannot provide assurance as to when, or if, we will become profitable.
Our ability to acquire anticipated needed additional financing to operate our business and difficulties we may face in acquiring additional financing on terms acceptable to us or at all.
Our ability to successfully integrate acquired businesses and personnel and exercise sufficient control to direct their operations. Our subsidiaries may not be able to obtain necessary permits and authorizations.
Disparate state-by-state regulatory landscapes and the constraints related to holding cannabis licenses in various states results in operational and legal structures for realizing the benefit from cannabis licenses that could result in materially detrimental consequences to us.
Security risks related to our physical facilities and cash transfers.
Our ability to generate revenue and be successful in the implementation of our business plan is dependent on consumer acceptance of and demand for our products.
Our business is subject to the risks inherent in agricultural operations, including supply chain reliability and contract disputes.
Cyberattacks, data or privacy breaches or technological malfunctions could undermine or inhibit our operations and expose us to losses, reputational harm, and liabilities.
Our insurance coverage may not cover all potential risks associated with our operations.
The inability of third-party suppliers to produce and ship certain products and orders in a timely manner, or at all.
We are dependent on key inputs, suppliers and skilled labor for the cultivation, extraction and production of cannabis products.
Our ability to attract and retain key personnel.
The outcome of any material litigation or regulatory proceedings in which we are, or may, be involved.
Difficulty protecting our intellectual property and enforcing claims related to our brands, trademarks, trade names, and proprietary processes.
Changes in Canadian or United States tax laws.
Our ability to raise further capital as the market price for our publicly traded shares is volatile (as well as for publicly traded cannabis companies generally), and our voting control is concentrated.
Unfavorable coverage by securities or industry analysts.
Currency fluctuations in the U.S. dollar relative to the Canadian dollar.
The effects of the weather, natural disasters, and health pandemics, including the novel coronavirus (COVID-19), on customer demand, our supply chain as well as our condensed consolidated results of operation, financial position and cash flows.
Impacts related to the COVID-19 pandemic, including, consumer demand volatility, supply chain disruptions, retail and manufacturing disruptions or mandated closures, and regulatory delays, among others.
Use of Names
In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms “we,” “us,” “our,” “Company” or “Harvest” refer to Harvest Health & Recreation Inc. together with its wholly owned subsidiaries.
25
Overview of the Business
We are one of the largest multi-state vertically integrated operators in the cannabis industry in the United States that operates from “seed to sale.”
Our business was established in Arizona and received its first license there in 2012. We were formed to own, operate and develop certain businesses related to the cultivation, processing, distribution and sale of cannabis and cannabis related products under the “Harvest” brand in jurisdictions where such cultivation, processing, distribution and sale is authorized under applicable state law.
We are one of the largest operators in the state of Arizona, which is one of the largest medical and recreational cannabis markets in the country and one of the oldest regulated cannabis markets in the world. Building on our success in Arizona, we have consistently grown our revenues and industry footprint every year since founding and currently operate facilities in Arizona, California, Florida, Maryland, Nevada, North Dakota and Pennsylvania. On February 19, 2021, we completed the divestiture of our North Dakota retail assets. Since 2013, we have won a variety of operating awards, including seven Best Dispensary awards issued by four independent organizations, four Best Medical Cannabis Strain awards, and one Best Medical Cannabis Product award.
During the remainder of 2021, we plan to expand cultivation facilities in key states, investing in new and existing operations for indoor, outdoor, and greenhouse cannabis to support product sales in retail and wholesale channels. We believe our approach to design, construction and implementation results in competitive production costs. More recently, we have shifted away from large acquisitions to focus on development of assets in core markets and streamlining operations as part of an overall plan to achieve profitability.
We conduct business through wholly owned and majority-owned operating subsidiaries, operating agreements and other commercial arrangements established to conduct the different business areas of each business (each an “Operating Subsidiary” and together, “Operating Subsidiaries”).
We operate in one segment, the cultivation, processing and sale of cannabis. We grow cannabis in outdoor, indoor, and greenhouse facilities for sale in our retail locations and for wholesale. In addition, we convert cannabis biomass into formulated oil using a variety of proprietary extraction techniques. We use some of this oil to manufacture products such as vaporizer cartridges and edibles. We sell cannabis, oil, and manufactured products in our dispensaries and to third parties for resale. In addition, we collect fees on contracts with third parties who provide services at certain cultivation facilities we are licensed to operate.
Our principal operating locations and type of operation are listed below as of March 31, 2021:
|
|
|
|
|
|
|
State
|
|
Nature of Operations
|
|
Commencement Periods
|
|
Arizona - 15 locations
|
|
Retail Dispensary
|
|
September 2013 - September 2020
|
|
California - 4 locations
|
|
Retail Dispensary
|
|
December 2018 - October 2019
|
|
Florida - 6 locations
|
|
Retail Dispensary
|
|
February 2019 - July 2019
|
|
Maryland - 3 locations
|
|
Retail Dispensary
|
|
September 2018 - December 2019
|
|
Pennsylvania - 9 locations
|
|
Retail Dispensary
|
|
September 2018 - March 2021
|
|
Arizona
|
|
Greenhouse/Outdoor Grow/Processing Lab
|
|
July 2015 - February 2020
|
|
Colorado - 1 location
|
|
Processing
|
|
Oct-20
|
|
Florida
|
|
Cultivation/Processing
|
|
February 2019 - December 2019
|
|
Maryland
|
|
Cultivation/Processing
|
|
September 2017 - July 2019
|
|
Nevada
|
|
Cultivation/Processing
|
|
August 2020
|
|
Pennsylvania
|
|
Cultivation/Processing
|
|
March 2020
|
|
Utah
|
|
Indoor Grow
|
|
October 2020
|
We are currently in various stages of expansion as we are growing our commercial footprint focusing on acquiring and building additional retail, cultivation and processing locations for medical and adult use cannabis. We expect to grow less through acquisitions and more through organic growth in the markets in which we already occupy.
Each Operating Subsidiary holds the active and/or pending cannabis licenses associated with its activities, staffs, manages or has a commercial arrangement with the operating locations, and/or owns the real estate and primary fixed assets used in the cannabis businesses.
In certain states, cannabis licenses are typically divided into three categories: dispensary, cultivation, and processing. Dispensary licenses comprise the retail operations and allow a company to dispense cannabis to patients. Cultivation licenses allow a company to grow cannabis plants and processing licenses allow for the conversion of cannabis into other products (e.g., edibles, oil, etc.). Cultivation and processing licenses comprise the wholesale operations. In other states, for example Arizona where our largest concentration of business
26
activity is located, cannabis licenses are defined as vertically integrated, which allows the license holder the right to engage in dispensary, cultivation, and processing activities.
Arizona Proposition 207, also known as the Smart and Safe Arizona Act, was a voter initiative to legalize the adult recreational use of marijuana that was approved by voters on November 3, 2020. The Smart and Safe Act directs the Arizona State Department of Health Services to establish rules for retail marijuana sales by June 1, 2021, allow marijuana to be subject to state and local sales taxes like other retail items, and would impose an additional 16% excise tax on marijuana products. On January 22, 2021, we recorded the first sale and started offering access to regulated and legal adult recreational use cannabis products to our customers.
Arrangement Agreement
On May 10, 2021, we entered into an Arrangement Agreement (the “Arrangement Agreement”) with Trulieve Cannabis Corp (“Trulieve”), pursuant to which Trulieve will acquire all of the issued and outstanding subordinate voting shares, multiple voting shares and super voting shares of Harvest pursuant to a plan of arrangement under the Business Corporations Act (British Columbia) (the “Arrangement”). Subject to the terms and conditions in the Arrangement Agreement, each subordinate voting share, multiple voting share and super voting share of Harvest outstanding immediately prior to the effective time of the Arrangement will be converted into 0.1170 of a share of Trulieve subordinate voting shares, subject to certain adjustments based upon the occurrence of certain permitted Harvest debt re-financings. At the effective time of the Arrangement, the multiple voting shares and super voting shares will be treated on an as if converted basis to subordinate voting shares pursuant to their respective terms. The obligations of Trulieve and Harvest to consummate the Arrangement are subject to customary conditions, including, but not limited to, (a) obtaining the required approval of Harvest’s shareholders, (b) obtaining an approval of the Supreme Court of British Columbia (or any other court with appropriate jurisdiction) at a hearing upon the procedural and substantive fairness of the terms and conditions of the Arrangement, (c) the absence of any injunction or similar restraint prohibiting or making illegal the consummation of the Arrangement or any of the other transactions contemplated by the Arrangement Agreement, (d) the required regulatory approvals having been obtained, including approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (e) no material adverse effect having occurred, (f) subject to certain materiality exceptions, the accuracy of the representations and warranties of each party and (g) the performance in all material respects by each party of its obligations under the Arrangement Agreement.
The foregoing description of the Arrangement Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the agreement which is included as Exhibit [2.1] to our Current Report on Form 8-K, filed on May 12, 2021.
We have prepared this Quarterly Report on Form 10-Q and the forward-looking statements contained in this Quarterly Report on Form 10-Q as if we were going to remain an independent company. If the Arrangement Agreement is consummated, many of the forward-looking statements contained in this Quarterly Report on Form 10-Q will no longer be applicable.
Results of Operations
The following table presents selected financial information derived from our condensed consolidated financial statements for the three months ended March 31, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
For The Three Months Ended March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Total Revenues
|
|
$
|
88,826
|
|
|
$
|
44,235
|
|
|
Less Cost of Goods Sold
|
|
|
40,908
|
|
|
|
26,086
|
|
|
Total Gross Profit
|
|
$
|
47,918
|
|
|
$
|
18,149
|
|
|
Total Expenses
|
|
$
|
34,565
|
|
|
$
|
43,169
|
|
|
Other (Expense) Income
|
|
$
|
(29,840
|
)
|
|
$
|
13,726
|
|
|
Net Loss Attributable to Harvest
|
|
$
|
(23,122
|
)
|
|
$
|
(15,384
|
)
|
|
Loss Per Share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
Adjusted EBITDA (non-GAAP)
|
|
$
|
26,916
|
|
|
$
|
(4,808
|
)
|
27
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Revenue
We derive our revenue from both our wholesale and retail businesses from cannabis products we manufacture, sell and distribute to third-party retail customers, and from direct sales to end consumers in our retail stores. In addition, we collect fees on contracts with third parties who provide services at certain cultivation facilities we are licensed to operate.
Revenue for the three months ended March 31, 2021 and 2020 was $88.8 million and $44.2 million, respectively, representing an increase of $44.6 million or 101%. Revenue growth was driven by the addition of newly opened and acquired dispensaries, growth in our existing cultivation, manufacturing, and retail operations and the legalization of adult recreational use of marijuana in Arizona. The Company generated revenue from 39 retail dispensaries during the first quarter of 2021, compared to 35 retail dispensaries in the prior year period. The launch of sales to adult use consumers in Arizona on January 22, 2021 in all 15 of the Company’s Arizona dispensaries contributed to retail revenue growth during the first quarter. The Company generated revenue from 12 cultivation and processing facilities in the first quarter, including contributions from Colorado, Nevada, and Utah that did not contribute revenue during the prior year period. Revenue growth during the quarter was partly offset by the divestiture of retail assets in Arkansas and North Dakota and a decline in licensing fees due to the cancelation and restructuring of margin dilutive contracts at the end of 2020.
Cost of Goods Sold
Cost of goods sold are derived from costs related to the internal cultivation and production of cannabis and from retail purchases made from other licensed producers operating within our state markets. Cost of goods sold includes the costs directly attributable to product sales and includes amounts paid for finished goods, such as flower, edibles, and concentrates, as well as packaging and other supplies, fees for services and processing, and allocated overhead which includes allocations of rent, administrative salaries, utilities and related costs. Cannabis costs are affected by various state regulations that limit the sourcing and procurement of cannabis product, which may create fluctuations in gross profit over comparative periods as the regulatory environment changes.
For the three months ended March 31, 2021, cost of goods sold was $40.9 million, an increase of $14.8 million or 57%, as compared to the three months ended March 31, 2020, driven by increased sales as described above.
Gross Profit & Gross Margin
Gross profit is revenue less cost of goods sold. Gross margin measures our gross profit as a percentage of revenue.
We have developed a strategy to focus primarily on revenue growth in our core markets while working to streamline the business and realize operational efficiencies. We expect to grow less through acquisitions and more through organic growth and continued development of the existing asset base in the remainder of 2021. Quarterly fluctuations in revenue mix may impact gross margins. Gross margins in our retail operations are the highest and most influential on reported results. As we continue to make investments in the cultivation and manufacturing of our own products for sale in our retail locations, we would expect the percentage of revenue from retail operations to increase and drive a favorable impact on gross margins. While there are likely to be quarterly fluctuations in gross margin, we expect the overall trend will be upward in the near term as we focus more heavily on core markets with greater profit potential.
Gross profit for the three months ended March 31, 2021 was $47.9 million, an increase of $29.8 million over the three months ended March 31, 2020. This represented a total gross margin of 54% for the three months ended March 31, 2021, an increase of 130 basis points as compared to a gross profit margin of 41% for the three months ended March 31, 2020. The increase in gross margin is primarily driven by improved gross margin on retail sales due to a reduction in discounts. The reduction in discounts is a result of an increase in retail sales related to the recreational sales in Arizona as well as other initiatives implemented to reduce discounts. The increase in licensing gross margin is due to the cancellation of a significant licensing agreement with a 1% gross margin further contributed to overall increased gross margin. The following are the increases and decreases in revenue and gross margin attributable to the Company’s three types of revenue.
The following table shows the total percentage of revenue generated by each of our revenue streams and the gross margin for each:
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended March 31,
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Increase/(Decrease)
|
|
|
Retail revenue
|
|
|
87
|
%
|
|
|
68
|
%
|
|
|
20
|
%
|
|
Wholesale revenue
|
|
|
10
|
%
|
|
|
14
|
%
|
|
|
(3
|
)%
|
|
Licensing and other revenue
|
|
|
2
|
%
|
|
|
18
|
%
|
|
|
(16
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail gross margin
|
|
|
55
|
%
|
|
|
49
|
%
|
|
|
5
|
%
|
|
Wholesale gross margin
|
|
|
42
|
%
|
|
|
29
|
%
|
|
|
13
|
%
|
|
Licensing and other gross margin
|
|
|
86
|
%
|
|
|
19
|
%
|
|
|
67
|
%
|
Total Expenses
Total expenses other than the cost of goods sold consist of general and administrative, sales and marketing costs, share-based compensation expense and depreciation and amortization.
General and administrative expenses include costs incurred at our retail sites and corporate offices, primarily related to personnel costs and operating costs, and other professional service costs. Sales and marketing costs include expenses related to marketing and branding activities and development and support of customer relationships.
As part of our ongoing efforts to achieve profitability we have implemented cost reduction measures across the organization. We expect to realize additional decreases in costs as we continue to streamline the business, realize the benefits of scale and operational efficiencies and focus more heavily on our core markets. Furthermore, we expect to have fewer acquisition and transaction costs related to our opportunistic expansion plans.
Share-based compensation includes the straight-line expense recognition of the grant date fair value of equity awards granted to employees and directors over their vesting lives. Depreciation and amortization includes the straight-line expense recognition of depreciation of property, plant and equipment over their depreciable lives. In addition, this includes the amortization of finite lived intangible assets.
Total expenses for the three months ended March 31, 2021 and 2020 were $34.6 million and $43.2 million, respectively.
The following table sets forth the components of our expenses:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
For The Three Months Ended March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Salaries and benefits
|
|
$
|
12,453
|
|
|
$
|
13,685
|
|
|
Rent and occupancy
|
|
|
5,348
|
|
|
|
5,188
|
|
|
Professional fees
|
|
|
3,445
|
|
|
|
4,335
|
|
|
Licensing and administration
|
|
|
3,351
|
|
|
|
2,350
|
|
|
Travel and entertainment
|
|
|
116
|
|
|
|
602
|
|
|
Other
|
|
|
1,563
|
|
|
|
259
|
|
|
Total general and administrative expenses
|
|
$
|
26,276
|
|
|
$
|
26,419
|
|
|
Sales and marketing
|
|
|
898
|
|
|
|
1,276
|
|
|
Share-based compensation
|
|
|
4,862
|
|
|
|
13,804
|
|
|
Depreciation and amortization
|
|
|
2,529
|
|
|
|
1,670
|
|
|
Total expenses
|
|
$
|
34,565
|
|
|
$
|
43,169
|
|
Total expenses decreased $8.6 million for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020. This decrease is primarily due to a $8.9 million decrease in share-based compensation expense primarily due to a $10.0 million charge for 2.4 million options surrendered by certain executives and redistributed by the Company during the three months ended March 31, 2020. The decrease from the prior year one-time charge was partially offset by new options issued, including certain options that vested 50% on January 1, 2021.
Total Other (Expense) Income
Total other expense for the three months ended March 31, 2021 was $29.8 million, an increase of $43.5 million compared to total other income of $13.7 million for the three months ended March 31, 2020. The $43.5 million decrease was primarily due to:
An increase of $31.4 million in the fair value adjustment of the warrant liability.
A decrease of $7.6 million in other income due to only having $1.5 million other income during the three months ended March 31, 2021, compared to $9.1 million during the three months ended March 31, 2020. During the three months ended
29
March 31, 2020, the $9.1 million of other income primarily consisted of a $12.6 million gain on a payment of contingent consideration due to former CBx owners partially offset by a $3.6 million loss to record a contingent liability related to the separation agreement between the Company and a former executive officer and director. During the three months ended March 31, 2021, the $1.5 million of other income primarily consisted of a $1.0 million gain upon the return and cancellation of MVS pursuant to the separation agreement between the Company and a former executive officer and director and a $0.6 million gain from the settlement of a lawsuit.
An increase of $4.1 million in interest expense. The increase is due to a decrease in interest income primarily driven by a $58.0 million decrease in notes receivable, as well as an increase in non-cash interest expense for the amortization of debt issuance costs and debt discounts, including discounts for warrants issued with debt.
Provision for Income Taxes
For the three months ended March 31, 2021 and 2020, federal and state income tax expense totaled $6.5 million and $3.8 million, respectively. The increase was primarily due to the increase in gross profit.
We are subject to income taxes in the jurisdictions in which we operate, and, consequently, income tax expense is a function of the allocation of taxable income by jurisdiction and the various activities that impact the timing of taxable events. As we operate in the illegal cannabis industry, we are subject to the limitations in Section 280E of the Internal Revenue Code of 1986, as amended (the “Code”), under which taxpayers are only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under Code Section 280E result in a higher effective tax rate than most industries. Therefore, the effective tax rate can be highly variable and may not necessarily correlate to pretax income or loss.
Discontinued Operations
Following the completion of the merger with Interurban Capital Group, LLC (formerly Interurban Capital Group, Inc.) (“ICG”), the Company sold ICG to a wholly owned subsidiary of Hightimes Holding Corp. (“Hightimes”) following the spinoff of certain assets. At the time of disposition, ICG’s primary assets consisted of rights to acquire eight “Have A Heart”-branded cannabis dispensaries in California (the “California HAH Dispensaries”). In addition, the Company agreed to sell Hightimes the equity of two additional entities controlled by Harvest that are seeking cannabis dispensary licenses in California (the “Harvest Dispensaries”). As a result, assets and liabilities allocable to these operations were classified as held for sale. In addition, revenue and expenses, gains and losses relating to the discontinuation of the California HAH Dispensaries operations were eliminated from profit or loss from the Company’s continuing operations for all periods presented.
The Company also entered into a plan to abandon certain product lines or lines of business to include CBD products or items of inventory, and the Company’s planned expansion in the state of Michigan. Any related assets and liabilities are classified as held for sale. In addition, the revenue, expenses, gains and losses related to the discontinuation of these activities were eliminated from profit or loss from the Company’s continuing operations for all periods presented.
Discontinued operations are presented separately from continuing operations in the condensed consolidated statements of operations for the three months ended March 31, 2021 and 2020 and the condensed consolidated statements of cash flows for the three months ended March 31, 2021 and 2020.
Net loss before discontinued operations and non-controlling interest for the three months ended March 31, 2021 and 2020 was a loss of $23.0 million and $15.1 million, respectively.
Non-GAAP Financial Measures
Adjusted EBITDA
Adjusted EBITDA is calculated as net income (loss) before non-controlling interest before net interest and other financing costs, income taxes, depreciation and amortization expenses; fixed and intangible asset impairments; gain or loss on sale of assets; change in fair value adjustment of liability; other (income) expense; foreign exchange gain (loss); share-based compensation expense; contract asset (recovery) impairment; discontinued operations, net of tax; other expansion expenses (pre-open); and transaction and other special charges.
We use adjusted EBITDA in assessing the effectiveness of our business strategies and as a factor in making incentive compensation decisions. In addition to its use by management, we also believe adjusted EBITDA is a measure widely used by securities analysts, investors, and others to evaluate financial performance of our company relative to our competitors. Adjusted EBITDA should not be considered a substitute for earnings before income taxes, net income or other results reported in accordance with GAAP. Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.
30
The following table provides a reconciliation of net income (loss) before non-controlling interest to adjusted EBITDA for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
For The Three Months Ended March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Net loss (GAAP) before non-controlling interest
|
|
$
|
(22,968
|
)
|
|
$
|
(15,472
|
)
|
|
Add (deduct) impact of:
|
|
|
|
|
|
|
|
Net interest and other financing costs(1)
|
|
|
8,721
|
|
|
|
4,716
|
|
|
Income tax
|
|
|
6,481
|
|
|
|
3,794
|
|
|
Amortization and depreciation(2)
|
|
|
3,519
|
|
|
|
2,454
|
|
|
(Gain) loss on sale of assets
|
|
|
(1,795
|
)
|
|
|
(2,419
|
)
|
|
Fair value adjustment of liability
|
|
|
24,434
|
|
|
|
(6,945
|
)
|
|
Other (income) expense(3)
|
|
|
(1,504
|
)
|
|
|
(9,050
|
)
|
|
Foreign currency (gain) loss
|
|
|
(12
|
)
|
|
|
138
|
|
|
Share-based compensation expense
|
|
|
4,862
|
|
|
|
13,804
|
|
|
Discontinued operations, net of tax
|
|
|
-
|
|
|
|
384
|
|
|
Other expansion expenses (pre-open)(4)
|
|
|
3,172
|
|
|
|
3,341
|
|
|
Transaction & other special charges
|
|
|
2,006
|
|
|
|
447
|
|
|
Adjusted EBITDA (non-GAAP)(5)
|
|
$
|
26,916
|
|
|
$
|
(4,808
|
)
|
(1)
Includes $4 and $166 of interest reported in cost of sales.
(2)
Includes $990 and $784 of depreciation reported in cost of sales.
(3)
Primarily represents gains and losses associated with settlements of contingent consideration, litigation, and other non-recurring charges.
(4)
These are set-up costs to prepare a location for its intended use. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, this adjustment enhances comparability to prior periods.
(5)
Adjusted EBITDA is a financial measure used by management that is not defined by U.S. GAAP and may not be comparable to similar measures presented by other companies. See discussion above for a definition of our adjusted EBITDA non-GAAP financial measure and reconciliation to the most directly comparable U.S. GAAP measure.
The Adjusted EBITDA income during the three months ended March 31, 2021 was $26.9 million, as compared to an Adjusted EBITDA loss of $4.8 million during the three months ended March 31, 2020. The period-over-period increase of $31.7 million in the Adjusted EBITDA is primarily attributed to increase in gross profit period-over-period as discussed in greater detail above.
Liquidity and Capital Resources
Working Capital
We use working capital and cash flow measures to evaluate the performance of our operations and our ability to meet our financial obligations. We define Working Capital as current assets less current liabilities. The calculation of Working Capital provides additional information and is not defined as a measure of financial performance under GAAP. This measure should not be considered in isolation or as a substitute for any standardized measure under GAAP. This information is intended to provide investors with information about our liquidity.
Other companies in our industry may calculate this measure differently than we do, limiting its usefulness as a comparative measure.
As of March 31, 2021, we had working capital of $69.3 million, an increase of $7.0 million as compared to December 31, 2020, driven primarily by an increase in cash driven by positive cash flows from increased revenues, as discussed in greater detail below. As of March 31, 2021 and 2020, we had total current liabilities of $119.4 million and $99.1 million, respectively, and cash and cash equivalents of $106.9 million and $78.1 million, respectively, to meet our current obligations.
31
Cash Flows
Cash flows for the three months ended March 31, 2021 and 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Three Months Ended March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
9,754
|
|
|
$
|
(7,458
|
)
|
|
Investing activities
|
|
|
13,128
|
|
|
|
(26,165
|
)
|
|
Financing activities
|
|
|
4,469
|
|
|
|
94,503
|
|
|
Net increase in cash and cash equivalents
|
|
|
27,351
|
|
|
|
60,880
|
|
|
Cash, cash equivalents, and restricted cash, beginning of period
|
|
|
82,597
|
|
|
|
30,685
|
|
|
Cash, cash equivalents, and restricted cash, end of period
|
|
$
|
109,948
|
|
|
$
|
91,565
|
|
Operating activities
Net cash provided by operating activities for the three months ended March 31, 2021 of $9.8 million consisted of a $23.0 million net loss, the net add-back of non-cash income statement items totaling $33.7 million and a $0.9 million net change in operating assets and liabilities. Included in the non-cash items were $24.4 million due to the change in fair value of warrant liabilities driven by increased stock price, $4.9 million for share-based compensation, and $5.1 million for depreciation and amortization.
Net cash used in operating activities for the three months ended March 31, 2020 of $7.5 million consisted of a $15.5 net loss, the net add-back of non-cash income statement items totaling $3.4 million and a $11.4 million net change in operating assets and liabilities. Included in the non-cash items were $13.8 for share-based compensation, $12.6 million gain on an earnout, $6.9 million gain for change in fair value of financial liability, and $6.1 million gain on deconsolidation of two Harvest entities.
Investing activities
Net cash provided by investing activities for the three months ended March 31, 2021 was $13.1 million, compared to net cash used in investing activities for the three months ended March 31, 2020 of $26.2 million. The increase of $39.3 million in cash provided was primarily due to proceeds of $22.3 million from the sale leaseback transaction during three months ended March 31, 2021, see Note 7 of our condensed consolidated financial statements in Item 1 for additional information, and $14.4 million in cash payments for business acquisitions during the three months ended March 31, 2020.
Financing activities
Net cash provided by financing activities for the three months ended March 31, 2021 and 2020, was $4.5 million and $94.5 million, respectively. The decrease of $90.0 million in cash provided during the three months ended March 31, 2021 was primarily due to a decrease in proceeds from issuances of equity and a decrease in proceeds received from non-convertible notes payable issued compared to prior year. During the three months ended March 31, 2021, there were proceeds from the exercise of warrants of $6.8 million compared to private equity issuances of $59.0 million during the three months ended March 31, 2020. Proceeds from non-convertible notes payable were $40.8 million during the three months ended March 31, 2020 compared to no proceeds from note payable issuances during the three months ended March 31, 2021.
Off-Balance Sheet Arrangements
As of March 31, 2021, we do not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on our results of operations or financial condition, including, and without limitation, such considerations as liquidity and capital resources.
Transactions with Related Parties
See Note 18 of our condensed consolidated financial statements in Item 1 for detail of our transactions with related parties.
Recently Issued Accounting Pronouncements
See Note 3 of our condensed consolidated financial statements in Item 1 for the impact of recently issued accounting pronouncements on the Company's condensed consolidated financial statements.
Critical Accounting Estimates
The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that impact the amounts reported in our condensed consolidated financial statements and accompanying notes
32
that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered relevant. Actual results may differ from these estimates.
There have been no material changes to our critical accounting estimates from those discussed in Item 7 of our 2020 annual report on Form 10-K.
Financial Instruments and Financial Risk Management
Our financial instruments consist of cash and cash equivalents, accounts receivable, member contribution receivable, notes receivable, due from related parties, investments, accounts payable and accrued liabilities, notes payable, derivative liability, liability for acquisition of noncontrolling interest and contingent consideration payable.
Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of the inputs to fair value measurements. The three levels of hierarchy are:
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2—Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly and
Level 3—Inputs for the asset or liability that are not based on observable market data.
Financial Risk Management
We are exposed in varying degrees to a variety of financial instrument related risks. Our board of directors mitigates these risks by assessing, monitoring and approving our risk management processes.
Credit Risk
Credit risk is the risk of a potential loss to us if a customer or third party to a financial instrument fails to meet its contractual obligations. The maximum credit exposure at March 31, 2021 is the carrying amount of cash and cash equivalents. We do not have significant credit risk with respect to our customers. All cash and cash equivalents are placed with major U.S. financial institutions.
We provide credit to our customers in the normal course of business. We have established credit evaluation and monitoring processes to mitigate credit risk but have limited risk as the majority of our sales are transacted with cash.
Liquidity Risk
Liquidity risk is the risk that we will not be able to meet our financial obligations associated with financial liabilities. We manage liquidity risk through the effective management of our capital structure. Our approach to managing liquidity is to ensure that we will have sufficient liquidity at all times to settle obligations and liabilities when due.
Market Risk
Market risk is the potential economic loss arising from adverse changes in market rates and prices, such as interest rates, foreign exchange rates, raw material and other commodity prices. Each type of market risk affecting the Company is discussed in Item 3 of this Quarterly Report on Form 10-Q.